reordering point

14
Hemwati Nandan Bahuguna Gharhwal University, Srinagar (A Central University) Centre for Mountain Tourism & Hospitality Sutdies M.B.A. (Tourism) IIInd sem Batch (2013-15) Subject:REORDERING POINT Submitted to Submitted by Dr. RAKESH Dhodi SAURAV RAWAT

Upload: saurav-rawat

Post on 06-Jul-2015

209 views

Category:

Documents


2 download

DESCRIPTION

Reordering point

TRANSCRIPT

Page 1: Reordering point

Hemwati Nandan Bahuguna Gharhwal University, Srinagar(A Central University)

Centre for Mountain Tourism & Hospitality SutdiesM.B.A. (Tourism) IIInd sem

Batch (2013-15)

Subject:REORDERING POINT

Submitted to Submitted by Dr. RAKESH Dhodi SAURAV RAWAT

Page 2: Reordering point

REORDERING POINT

SUBMITTED BYSAURAV RAWAT

Page 3: Reordering point

The reorder point ("ROP") is the levelof inventory which triggers an action to replenish thatparticular inventory stock. It is normally calculated asthe forecast usage during the replenishment leadtime plus safety stock. In the EOQ (Economic OrderQuantity) model, it was assumed that there is no timelag between ordering and procuring of materials.Therefore the reorder point for replenishing thestocks occurs at that level when the inventory leveldrops to zero and because instant delivery bysuppliers, the stock level bounce back.

Page 4: Reordering point

Reorder point is a technique todetermine when to order; itdoes not address how much toorder when an order is made.

Page 5: Reordering point

• The reorder point can be different for every itemof inventory, since every item may have adifferent usage rate, and may require differingamounts of time to receive a replenishmentdelivery from a supplier.

• For example, a company can elect to buy thesame part from two different suppliers; if onesupplier requires one day to deliver an order andthe other supplier requires three days, then thecompany's reorder point for the first supplierwould be when there is one day's supply left onhand, or three days' supply for the secondsupplier.

Page 6: Reordering point

• Predicting an optimal amount of stock forvarying costumer demands is a criticalcomponent in balancing an operation’sinventory system. Your inventory systemshould act as a reserve of products to meetyour sales needs, while minimizing theamount of cash you have tied up in inventory.

• One of the most widely accepted methodsused for effective inventory management isthe reorder point formula, a standardizedformula that triggers the system the instantyour inventory drops to the reorder point andplaces an order before you hit a stockout.

Page 7: Reordering point

The basic formula for the reorder pointis to multiply the average daily usagerate for an inventory item by the leadtime in days to replenish it.

• Reorder Point = Normal consumptionduring lead-time + Safety Stock

• (average period demand)*Lead Timeperiods

Page 8: Reordering point

• To guard against the later condition, acompany may alter the reorder formula to adda safety stock, so that the formula becomes:

• (Average daily usage rate x Lead time) + Safetystock

• This formula alteration means thatreplenishment stock will be ordered sooner,which greatly reduces the risk that there willbe a stockout condition.

Page 9: Reordering point

GOAL

• The goal in ordering is to place an order when the amount of inventory on hand is sufficient to satisfy demand during the time it takes to receive that order (i.e., lead time). There are four determinants of the reorder point quantity:

• The rate of demand (usually based on a forecast).• The lead time.• The extent of demand and/or lead time

variability.• The degree of stockout risk acceptable to

management.

Page 10: Reordering point

Conclusion

• Implementation of the reorder formula hasworked in a variety of business environments.It’s a cost-saving method that can helpprevent stockouts, missed opportunities insales, and a possible interruption in youroperational process.

Page 11: Reordering point

• In real life situations one never encounters a zero leadtime. There is always a time lag from the date ofplacing an order for material and the date on whichmaterials are received. As a result the reorder point isalways higher than zero, and if the firm places theorder when the inventory reaches the reorder point,the new goods will arrive before the firm runs out ofgoods to sell. The decision on how much stock to holdis generally referred to as the order point problem, thatis, how low should the inventory be depleted before itis reordered.

• The two factors that determine the appropriate orderpoint are the delivery time stock which is the Inventoryneeded during the lead time (i.e., the differencebetween the order date and the receipt of theinventory ordered) and the safety stock which is theminimum level of inventory that is held as a protectionagainst shortages due to fluctuations in demand.

Page 12: Reordering point

• Several factors determine how much delivery time stockand safety stock should be held. In summary, the efficiencyof a replenishment system affects how much delivery timeis needed. Since the delivery time stock is the expectedinventory usage between ordering and receiving inventory,efficient replenishment of inventory would reduce the needfor delivery time stock. And the determination of level ofsafety stock involves a basic trade-off between the riskof stockout, resulting in possible customer dissatisfactionand lost sales, and the increased costs associated withcarrying additional inventory.

• Another method of calculating reorder level involves thecalculation of usage rate per day, lead time which is theamount of time between placing an order and receiving thegoods and the safety stock level expressed in terms ofseveral days' sales.

• Reorder level = Average daily usage rate x lead-time in days

Page 13: Reordering point

• If the average daily usage rate of a material is 50units and the lead-time is seven days, then:

• Reorder level = Average daily usage rate x Leadtime in days = 50 units per day x 7 days = 350units

• When the inventory level reaches 350 units anorder should be placed for material. By the timethe inventory level reaches zero towards the endof the seventh day from placing the ordermaterials will reach and there is no cause forconcern.

• Re-order point = Average Lead Time*AverageDemand + Service Level*SQRT(Avg. LeadTime*Standard Deviation of Demand^2 + Avg.Demand^2*Standard Deviation of Lead Time^2)

Page 14: Reordering point