ORTEGA, SHANNEN S.

BSA 2-1

ACTIVITY 3

1. What is Economic Order Quantity? What is its significance in inventory management?

- Economic Order Quantity is a production-scheduling model by Ford W. Harris which

determines how many units should be added to the inventory of the company at its optimum such
that the inventory costs- holding, order, and shortage costs be minimized.

- In EOQ, the inventory count is monitored regularly because when it reaches a specific
reorder point, or that which signals the replenishment of inventory, a fixed quantity is purchased.

- EOQ is a significant tool for decision-making process of the business when it comes to
keeping inventories on hand, determining the order count, and maintaining a schedule as to when
to reorder items without having to pay for too much inventory costs.

2. What is Reorder Point? What is its significance in inventory management?

- A reorder point signals the replenishment of the company’s inventory level.

- Reorder point is significant in inventory management for it helps avoid purchasing at an

indefinite and unnecessary period for the restocking of the items. It gives just the exact time
when to order the items so that a smooth flow for production is followed.

- A reorder point is computed by multiplying the average daily usage rate for an
inventory item by the lead time, or the time it takes for the items to arrive.

3. What is Materials Requirement Planning (MRP)? Describe its significance in inventory

management. Distinguish MRP 1 and MRP 2.

- Materials Requirement Planning is a system of inventory management which is used to

estimate the order count of raw materials as well as its delivery schedule. Forecasting is used for
this system in determining the demand for the products. Through forecasts, the amount and type
of products as well as the quantity required for production are known.
 - It is beneficial for inventory management because it helps the production managers
meet the current and future demand of the customers. It maintains enough inventory levels of
production such that the customer needs be met for it answers the questions: “What is needed?”,
“How much is needed?”, and “When is it needed?”.

- The first MRP system or the MRP 1 was first utilized in the 1940s and 1950s. In this
system, mainframe computers are used to estimate bill information of materials that will be
applied for specific finished product into a production or purchasing plan.

- The MRP 2 included the marketing, finance, accounting, engineering, and human
resources for production planning. It can be associated with the Enterprise Resource Planning
(ERP) which uses the technological advancement of computer to process relevant information of
the business into functional areas.

[I paraphrased what I’ve learned from these references. Thanks, Sir! And keep safe! ]

References:

https://www.investopedia.com/terms/e/economicorderquantity.asp

https://www.inc.com/encyclopedia/economic-order-quantity-eoq.html

https://www.accountingtools.com/articles/what-is-a-reorder-point.html

https://www.inflowinventory.com/blog/reorder-point-formula-safety-stock/

https://www.investopedia.com/terms/m/mrp.asp

https://www.inc.com/encyclopedia/material-requirements-planning-mrp.html

https://www.smartsheet.com/guide-to-material-requirements-planning