Reorder Points

Simple inventory models assume that receipt of an order is instantaneous.

In other words, they assume

(1) that a firm will place an order when the inventory level for that particular item reaches zero and
(2) that it will receive the ordered items immediately.

However, the time between placement and receipt of an order, called lead time, or delivery time, can be
as short as a few hours or as long as months.

Thus, the when-to-order decision is usually expressed in terms of a reorder point (ROP)—the inventory
level at which an order should be placed

When demand is not constant or variability exists in the supply chain, safety stock can be
critical.

The reorder point (ROP) is given as:

ROP = Demand per day * Lead time for a new order in days
ROP = d * L

The inclusion of safety stock (ss) changed the expression to:

ROP = d * L + ss

The amount of safety stock maintained depends on the cost of incurring a stockout and the cost of
holding the extra inventory.

Annual stockout cost is computed as follows:

Annual stockout costs = The sum of the units short for each demand level * The probability of that
demand level * The stockout cost/unit * The number of orders per year

Lead time
In purchasing systems, the time between placing an order and receiving it; in production systems, the
wait, move, queue, setup, and run times for each component produced.

Reorder point (ROP)

The inventory level (point) at which action is taken to replenish the stocked item.

Safety stock (ss)

Extra stock to allow for uneven demand; a buffer.