Reorder Point Systems

EOQ with a reorder point

The reorder point problem
The service level method
Fixed-order-interval model
Reading: Page 563-573

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EOQ with a Reorder Point

The replenishment leadtime or simply leadtime is
denoted by L (we assume L < T )
With deterministic demand , the leadtime demand
= DL and R=DL is called the reorder point
The deterministic reorder point policy: whenever
the remaining inventory is reduced to R, we order
exactly the EOQ so that there will be no stock out
and inventory cost is minimized
What is R if L T?
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Leadtime and Reorder Point

Order in advance
so that the remaining
inventory can satisfy
the leadtime demand

Q
I

Reorder
point

Place Receive
order order

Time
Place
order

Receive
order

Leadtime
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What should you do if leadtime

demand is not known exactly?
We now consider the problem of
when to order

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The Reorder Point Problem

Inventory depletion (by demand) monitored
continuously
Good estimate for the total demand in a year
Usually impossible to forecast future demand
very accurately for a short time period
How to compute the reorder point when
leadtime demand is known probabilistically?
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The Reorder Point

When placing an
replenishment order, the
remaining stock should
cover the leadtime demand
Any new order can only be
used for demands after L
Demand in L is uncertain
How to determine the
remaining inventory R
when an order is placed?

Inventory on hand

order

R1
R2

L
L

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The Service Level Method

Service level:
Service level is a measure of the degree of stockout
protection provided by a given amount of safety
inventory

= Probability that all leadtime demands are

satisfied immediately, i.e.,

= Prob.( Leadtime Demand R)

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(1)

Normal Leadtime Demand

R = + z

(2)

s = z
R = mean leadtime demand + safety stock
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Safety Stock
Assuming normally distributed leadtime demand, the
problem is transformed to that of determining the safety
stock
Inventory on hand
Q

order

order

order

R
mean demand during
supply leadtime
safety stock
L

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Time t
9

Example: Southern Metal Doors (SMD)

The weekly sales of metal doors at SMD Ltd. in Dong
Guan vary, with an average of 1000/week and a standard
deviation of 250/week. SMDs production follows the sales
closely, so that the consumption of a main metal material
follows the same distribution
The replenishment leadtime of this main metal material
from the supplier is 1 week
SMD is currently placing an order whenever the remaining
material is only enough to make 1200 doors
What is the probability of no stockout in the leadtime?
If SMD wants the service level to be 95%, what should the
safety stock be?
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SMDs Service Level

Service Level: SL = ? (The area of the shaded part under the curve)

Mean: = 1000

Oct 23

R = 1200

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Computing Service Level

Average weekly demand = 1000

Standard deviation of demand = 250
R = 1200,
We assume the sales (demand) is normally distributed:
z = (R ) / = 0.8
Service Level
SL = Probability (Leadtime Demand 1200)
= 78.8%

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Computing Safety Stock and Reorder Point

What should the reorder point and safety stock
for a = 95% service level be?
From the normal table
z0.95 = 1.645
Safety stock:
Reorder point:

Oct 23

s = z0.95= 412
R =+s = 1412

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The Impact of Service Level

s
increase

79%
200

90% 95% 98% 99%

321 412 514 582
61% 28% 25% 13%

Observations:
The higher the service level is, the higher the
safety stock is required;
When service level is high, it takes relatively
more stock to increase it.
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Fixed-Order-Interval Model
Key
Periodic review model
Fixed time interval for each order

Decision
How much to order (Q)

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Computing Q

OI = Order interval (length of time between orders)

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Inventory on hand

order

Q
order

Safety
stock
LT

OL

Time t

LT+OL
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Risk of a Stockout for SMD

Suppose OI = 3 weeks, A =1300 units, Q= 3500 units
mean demand per week = 1000 units, standard deviation =
250 units
Risk at the end of the initial lead time
z= (1300 1000)/250 =1.2
By Normal table, SL = 0.885 =88.5%
Risk = 1 88.5% = 11.5%
Risk at the end of the second leadtime
z= (1300+3500 4 1000)/(25041/2) =1.6
By Normal table, SL = 0.945 =94.5%
Risk = 194.5% = 5.5%
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Review Problems
Problem 21 at Page 588
Problem 27 at Page 589
Problem 29 at Page 589

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