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Order Point Determination

There must be some method to show when the quantity of an item on hand has  reached the order point. There are many systems, but they all are inclined to be variations or extensions of 2 basic systems: the two-bin system and the perpetual inventory system.

Changing Safety Stock

Records of actual demand and forecasts are normally made on a weekly or monthly basis for all items regardless of what the individual lead times are. It is impossible to measure the variation in demand about average for each of the lead times. Some method of adjusting standard deviation for the different time intervals is needed.

Safety Stock Calculations

Safety stock is intended to protect against uncertainty in supply and demand. Uncertainty may occur in 2 ways: quantity uncertainty and timing uncertainty. Quantity uncertainty occurs when the amount of supply and demand varies. Timing uncertainty occurs when the time of receipt of supply or demand differs from than expected.

Order Point System

When the quantity of an item on hand in inventory falls to a predetermined level, called an order point, an order is placed. The quantity ordered is usually precalculated and based on economic-order-quantity concepts.

Period Order Quantity

The EOQ attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform. Often demand is not uniform, particularly in MRP and using the EOQ does not produce a minimum cost. The period order quantity lot-size rule is based on the same theory as the EOQ. It uses the EOQ formula to calculate an economic time between orders. This is calculated by dividing the EOQ by the demand rate. This produce a time interval for which orders are placed.

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