Re-order period - standard eoq model, Financial Accounting

The standard EOQ model supposes that materials can be procured immediately and thus implies that the firm may place an order for replenishment as the inventory level drops to zero. In the real world, although, procurement of materials takes time and thus the order level must be such the inventory at the time of ordering suffices and meets the requirements of production during the procurement period termed is also termed as Lead Time.

If the usage rate of materials and the lead time for procurement are identify with positively then the ordering level would easily as:

Lead-time in days for procurement X Average daily usage

As the usage rate and lead time are probable to vary: the reorder level must be higher than the normal consumption period need throughout the procurement period so as to provide a measure of safety in the face of variability of lead time and usages.  Places differently, the reorder level must be equal to as:

Normal consumption + Safety stock

Posted Date: 4/9/2013 5:44:01 AM | Location : United States

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