Page 159 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes 5. Inventory is not a reserve system to prevent stockouts.
6. Average inventory is defined as half the batch size plus safety stock.

7.3 Planning Inventory

This section describes the key parameters and procedures for planning inventory. The discussion
focuses on three issues: when to order, how much to order, and inventory control procedures.

7.3.1 Determining Order Point (When to Order?)

The reorder point determines when a re-supply shipment should be initiated. The reorder point,
which is defined by item and distribution centre, can be specified in terms of units or days of
supply.
This discussion focuses on determining reorder points under conditions of demand and
performance-cycle certainty. The certainty conditions imply that future demands and
performance-cycle lengths are known.
The basic reorder point formula is:

R = D × T
where R = reorder point in units
D = average daily demand
T = average performance-cycle length

To illustrate this calculation, assume demand of 10 units/day and a 20-day performance cycle. In
this case,
10 units/day × 20 days = 200 units

The use of the reorder point formulations implies that the re-supply shipment will arrive just as
the last unit is shipped to a customer. This approach is satisfactory as long as both demand and
performance cycles are certain. When there is uncertainty in either demand or performance-
cycle length, an inventory buffer is necessary to compensate for the uncertainty.

Did u know? The buffer, which is usually called safety stock, handles customer demands
during longer than expected performance cycles or above average daily demand.

When this buffer stock is necessary for conditions of uncertainty, the reorder point formula is
R = D × T + SS
where R = reorder point in units

D = average daily demand
T = average performance-cycle length
SS = safety or buffer stock in units

7.3.2 Determining Lot Size (How Much?)

The lot sizing concept balances the cost of maintaining inventories against the cost of ordering.
The key to understanding the relationship is to remember that average inventory is equal to

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