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Order Point System

By Anonymous - Posted on 13 February 2012

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.

Using this system, an order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until the new stock arrives (called the lead time). Demand during any one lead-time period probably varies from the average demand. Statistically, half the time the demand is greater than average and there is stockout. If it necessary to provide some protection against stockout, safety
stock can be added. The item is ordered when the quantity on hand falls to a level equal to the demand during the lead time plus the safety stock:

OP = order point, DDLT = demand during lead time, SS = safety stock

Figure shows the relationship between safety stock, lead time, order quantity and order point. With the order point:
- Order quantities are usually fixed;
- The order point is determined by the average demand during the lead time. If the average change in the order point, effectively there has been a change in safety stock;
- The intervals between replenishment are not constant but vary depending on the actual demand during the reorder cycle;
- Average inventory = order quantity/2 + safety stock = Q/2 + SS.

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