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Operations Management

Reorder Point
DON PAUL

Definition:

Reorder Point (ROP)

TheReorder Point(ROP) is the level ofinventory which


triggers an action to replenish that particular inventory
stock.

It is normally calculated as the forecast usage during the


replenishmentlead timeplus safety stock.

In theEOQ (Economic Order Quantity)model, it was


assumed that there is no time lag between ordering and
procuring of materials. Therefore the reorder point for
replenishing the stocks occurs at that level when the
inventory level drops to zero and because instant delivery
by suppliers, the stock level bounce back.

Reorder point is a technique to determinewhento order;

Cont.

In real life situations one never encounters a zerolead time.


There is always a time lag from the date of placing an order
for material and the date on which materials are received.
As a result the reorder point is always higher than zero, and
if the firm places the order when the inventory reaches the
reorder point, the new goods will arrive before the firm runs
out of goods to sell. The decision on how much stock to
hold is generally referred to as the order point problem.

General Expression

The two factors that determine the appropriate order point are
the

delivery time stock which is the Inventory needed during the


lead time (i.e., the difference between the order date and the
receipt of the inventory ordered) and thesafety stock which is
the minimum level of inventory that is held as a protection
against shortages due to fluctuations in demand.
Reorder Point (R) = Normal consumption during lead-time
+ Safety Stock
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ROP : Constant demand and lead time

For basic EOQ model with const. demand and const. lead time
to receive an order is equal to the amount demanded during lead
time.
Reorder Point (R) = Normal consumption during lead-

time

R = d x LT
Where d = demand rate per period(units per day or week)
LT = lead time in days or weeks

Problem 1
An ePaint Internet store is open 311 days per year.
If annual demand is 10,000 gallons of Ironcoat paint
and the lead time to receive an order is 10 days,
determine the reorder point for paint.

Solution
Demand (d) = 10,000 gallons/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154 gallons/day
Lead time = LT = 10 days
R = d x LT = (32.154)(10) = 321.54 gallons

lead time
If the inventory level might be depleted at a faster rate during
lead time,

Variable demand with a Reorder point


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lead time
When demand is uncertain, asafetystockof inventory is

Inventory level

frequently added to the expected demand during lead time.

Reorder
point, R

Safety Stock

LT
LT
Time
Reorder point with a Safety Stock

Service Level
The probability that the inventory available
during lead time will meet demand.
Stockout means an inventory shortage.
A service level of 90% means there is 0.90
probability that demand will be met during the
lead time and the probability that a stockout will
occur is 10%.

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Expression
R
= dLT + z d
where d = average daily demand
LT
= lead time
d = standard deviation of daily demand
Z
= number of standard deviations corresponding to the service
level
probability
z d = safety stock
The term d in this formula for the reorder point is the square root of
the sum of the daily variances during lead time:
Variance = (daily variance) x (number of days of lead time)
=
Standard deviation =
=

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Problem 2
For ePaint internet store, assume that daily demand
for Ironcoat paint is normally distributed with an
average daily demand of 30 gallons and a standard
deviation of 5 gallons of paint per day. The lead
time for receiving a new order of paint is 10 days.
Determine the reorder point and safety stock if the
store wants a service level of 95% with the
probability of a stock out equal to 5%.

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Solution
d = 30 gallons per day
LT = 10 days
d = 5 gallons per day
For a 95% service level, z = +1.65(from table Area under
the standardized

Safety stock

= z d

normal curve)

= (1.65)(5)( )
= 26.1 gallons

R=
dLT + z d

= 30(10) + 26.1
= 326.1 gallons
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Expression
If only lead time is variable, then dLT = dLT

R = dLT + zd LT
where d = demand rate
LT
= average lead time
LT = standard deviation of lead time
Z
= number of standard deviations corresponding to the service
level
probability

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Problem 3
A motel uses approximately 600 bars of soap each
day and this tends to be fairly constant. Lead time
for soap delivery is normally distributed with a
mean of six days and a standard deviation of two
days. A service level of 90 percent is desire.
a) Find the ROP.
b) How many days of supply are on hand at the
ROP?

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Solution
d = 600 bars per day
SL = 90%, so z = 1.28

(from table Area under the

standardized normal curve)

LT = 6 days
LT = 2 days
a) R = dLT + zdLT = 600x(6) + 1.28x(600)x(2) =
5136 bars of
soap
b) No of Days = R/d =5136/600 = 8.56 days

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Expression
If both demand and lead time are variable, then dLT

R=
where d = average demand rate
LT
= average lead time
LT = standard deviation of lead time
d
= standard deviation of demand rate
Z
= number of standard deviations corresponding to the service
level
probability

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Problem 4
The motel replaces broken glasses at a rate of 25
per day. In the past, this quantity has tended to
vary normally and have a standard deviation of 3
glasses per day. Glasses are ordered from a
Cleveland supplier. Lead time is normally distributed
with an average of 10 days and a standard
deviation of 2 days. What ROP should be used to
achieve a service level of 95 percent ?

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Solution
d =
25 glasses per day
SL = 95%, so z = +1.65

(from table Area under the

standardized normal curve)

LT = 10 days
LT = 2 days
R=

= 3 glasses per day

= 25(10) + 1.6
= 334 glasses

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Problem 5
A restaurant uses an average of 50 jars of a special
sauce each week. Weekly usage of sauce has a
standard deviation of 3 jars. The manager is willing
to accept no more than a 10 percent
risk of stockout during lead time, which is two
weeks. Assume the distribution of usage is normal.
a. Which of the above formulas is appropriate for
this situation? Why?
b. Determine the value of z.
c. Determine the ROP.
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Solution
d = 50 jars per week
LT = 2 weeks
d = 3 jars per week
Acceptable risk = 10 percent, so service level is 0.90

a. Because
only demand is variable(i.e has a standard devi

formula R

= dLT + z d is appropriate

b. From table for service level 0.9000, z = +1.28


c.

R = dLT + z d
= 50(2) + 1.28(3)
= 105.43
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interval model
Orders are placed at fixed time intervals
If demand is variable, the order size will tend to
vary from cycle to cycle
Two types :

Fixed-quantity ordering
Fixed-interval ordering

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Determining the amount to order

If both the demand rate and lead time are constant, the
fixed-interval model and the fixed-quantity model function
identically.

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Expression

OI = Order interval (length of time between orders)


A = Amount on hand at reorder time

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Problem 6
Given the following information, determine the
amount to order.
d = 30 units per day

Desired service level =

99 percent
d

= 3 units per day

Amount on hand at reorder time = 71 units


LT = 2 days
OI = 7 days

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Solution
z = 2.33 for 99 percent service level
Amount to order = d(OI + LT) + z d - A
=30(7+2) + 2.33(3) - 71 = 220 units

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Problem 7
Given the following information, determine the
amount to order.
d = 10 units per day
d

= 2 units per day

A = 43 units
Q = 171 units
LT = 4 days
OI = 12 days
Determine the risk of a stockout at
a. The end of the initial lead time.
b. The end of the second lead time.
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Solution
a.

R= dLT + z d
43 =10x4 + z(2)(2)

z =0.75
So from the table service level is 0.7734
The risk = 1-0.7734 = 0.2266, which is fairly high.
b. Amount to order = d(OI + LT) + z d - A
171=10(4+12) + z x (2) - 43
Solving z = +6.75
This value is way out in the right tail of the normal distribution,
making the service level virtually 100 percent and thus, the risk of a
stockout at this point is essentially equal to zero.

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SinglePeriod Model
Single-period model (sometimes referred to as
the newsboy problem) is used to handle ordering
of perishables (fresh fruits, vegetables, seafood,
cut flowers) and items that have a limited useful
life (newspapers, magazines, spare parts for
specialized equipment).
Focuses on two costs: Shortage cost
Excess cost

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Cont.
Shortage cost may include a charge for loss of

customer goodwill as well as the opportunity cost of lost


sales. Generally, shortage cost is simply unrealized
profit per unit.

C shortage (Cs) = Revenue per unit - Cost per unit


Excess cost pertains to items left over at the end of

the period. In effect, excess cost is the difference


between purchase cost and salvage value.

C excess (Ce) = Original cost per unit - Salvage value


per unit
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Continuous stocking levels


The stocking level equalizes the cost weights.
The service level is the probability that demand
will not exceed the stocking level, and
computation of the service level is the key to
determining the optimal stocking level(So).
Service level (SL)=
Where

Cs / ( Cs + Ce)

Cs = shortage cost per unit

Ce = excess cost per unit

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Problem 8
Sweet cider is delivered weekly to Cindys Cider Bar.
Demand varies uniformly between 300 liters and
500 liters per week. Cindy pays 20 cents per liter for
the cider and charges 80 cents per liter for it.
Unsold cider has no salvage value and cannot be
carried over into the next week due to spoilage.
Find the optimal stocking level and its stockout risk
for that quantity.

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Solution
Ce

= Cost per unit - Salvage value per unit


=$0.20 - $0
=$0.20 per unit

Cs = Revenue per Cost per unit


=$0.80 - $0.20
=$0.60 per unit
SL =

Cs / ( Cs + Ce) = 0.60/ ( 0.60 + 0.20) = 0.75

Thus, the optimal stocking level must satisfy demand 75 percent of the time. For the
uniform distribution, this will be at a point equal to the minimum demand plus 75
percent of the difference between maximum and minimum demands

So =

300 + .75(500 - 300) = 450 liters

The stockout risk = 1-0.75 = 0.25


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Problem 9
Cindys Cider Bar also sells a blend of cherry juice
and apple cider. Demand for the blend is
approximately normal, with a mean of 200 liters per
week and a standard deviation of 10 liters per
week. Cs= 60 cents per liter and Ce= 20 cents per
liter. Find the optimal stocking level for the applecherry blend.

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Solution
SL =

Cs / ( Cs + Ce) = 0.60/ ( 0.60 + 0.20) = 0.75

This indicates that 75 percent of the area under the normal


curve must be to the left of the stocking level.
The value of z is between 0.67 and 0.68, say, +0.675, will
satisfy this. The optimal stocking level is So = mean + z

So = 200 liters+ 0.675(10 liters) = 206.75 liters

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Summary

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