Description
The Reorder Point (ROP) is that inventory level when an order should be placed. If demand and purchase lead time are both constant, the ROP is simply:
R = d x LT
where:
d = Demand rate (units per day or week)
LT = Lead time (in days or weeks)
Note: Demand and lead time must have the same time units.
This video illustrates ROP and how to determine it. In this example you have a jewellery manufacturer buys semi-precious stones to make bracelets and rings. The supplier has quoted a price of $8 per stone for order quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and $10 per stones for smaller order quantities. The jewellery manufacturer operates 200 days per year. Usage rate is 25 stones per day, and ordering cost is $48 per order.
a. If annual holding cost is 30 percent of unit cost, what is the optimal order quantity?
b. If lead time is six workdays, at what inventory level should the company reorder?
c. If safety stock of 50 units is required, at what inventory level should the company reorder?