Stevenson 13 Inventory Management Learning Objectives

Quantity Discount Example

Order Quantity		Total Cost
70		14,968
80		14,154
100		13,354

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• 100 cases per order yields the lowest total cost, 100 cases is the overall optimal order quantity.
• With Quantity Discounts, purchase quantity will be equal to or greater optimal economic quantity.

When to Reorder with EOQ Ordering

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• Reorder Point - When the quantity on hand of an item drops to this amount, the item is reordered
• Safety Stock - Stock that is held in excess of expected demand due to variable demand rate and/or lead time.
• Service Level - Probability that demand will not exceed supply during lead time.

Determinants of the Reorder Point

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• The rate of demand
• The lead time
• Demand and/or lead time variability
• Stockout risk (safety stock)
• If demand and lead time are both constants, then ROP = dxLT

Safety Stock

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• Safety stock reduces risk of
• stockout during lead time

Reorder Point Example

• Rahim takes Two-a-Day vitamins, which are delivered to his home seven days after an order is called in. At what point should Rahim reorder?

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• Rahim should reorder when 14 vitamin tablets are left, which is equal to a seven-day supply of two vitamins a day.

Safety Stock

• When variability is present in demand or lead time, it creates the possibility that actual demand will exceed expected demand. Consequently, it becomes necessary to carry additional inventory, called safety stock , to reduce the risk of running out of inventory (a stockout) during lead time. The reorder point then increases by the amount of the safety stock:

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• For example, if expected demand during lead time is 100 units, and the desired amount of safety stock is 10 units, the ROP would be 110 units