Setting a reorder point - rop, Finance Basics

Assignment Help:

Setting a Reorder Point - ROP 

Once the order quantity has been determined, the next question to be settled is when to place the order. If an order is released and it takes three weeks before the order is received, there must be sufficient stock held to ensure that there are no stock outs. This level of stock is referred to as the order point. When the stock level falls to the ROP release an order for quantity Q. This is illustrated in this figure.

 L = lead time = the time between releasing and receiving the order.

In the example of the desk lamps, if the lead time were three weeks and the average demand were 1000/52 = 19.2 per week = 57 (set the ROP at 60 units).

There are a number of managerial points to note: 

  • This model can be applied when items are not related (independent of each other) as is the case with products in a retail store: light bulbs and bags of cement or tins of beans or bandages
  • The model cannot be applied for semi-finished parts or raw material where there are linkages between products and components
  • The model's 'efficiency' is altered if the assumptions are incorrect, this may be the case if demand fluctuates or costs alter over short periods
  • If we know the fluctuations of the weekly or monthly demand quantity from past data, we can apply a standard deviation to the demand figure and establish a buffer stock in addition to the ROP which would accommodate these variations
  • The total cost calculation is relatively insensitive to variations in the order quantity (Q). As the curve is relatively flat around the minima (see lower figure on page 324), the EOQ may change without affecting the total cost.
  • This means that the EOQ calculated is always an approximation.

 

So, if the EOQ = 267.82, order 300. 

  • Sometimes you may find staff order EOQ quantities without understanding the limitations inherent in the model
  • Bif discounts are offered for minimum order quantities, we must calculate the total costs associated with the EOQ order and the discount quantity in order to determine which approach offers the least cost overall
  • The terms economic order quantity (EOQ) or economic batch quantity (EBQ) or economic lot have the same meaning - the more common term however is EOQ.

Related Discussions:- Setting a reorder point - rop

Different risk-profile - shareholders and management, Different Risk-profil...

Different Risk-profile - Shareholders and Management Shareholders will generally prefer high-risk-high return investments while they are diversified that is they have many inv

Determinants of required rate of return, Determinants of Required Rate of R...

Determinants of Required Rate of Return 1.Risk free rate - This is the interest rate such would exist on default free securities like Treasury bills and bonds. Risk free

Capital market authority (cma), Capital Market Authority (CMA) Was est...

Capital Market Authority (CMA) Was established in 1990 with an Act of Parliament to assist, in creation of a conducive environment, for growth and development of capital marke

Gross requirements of mrp system, Gross requirements of MRP System Acc...

Gross requirements of MRP System Accumulation of demand for this item from all sources independent and dependent. For instance, customer orders, spare part requirements, repla

What is dependency ratio and why is it important, Question 1: a) What ...

Question 1: a) What is dependency ratio and why is it important for pensions? b) For which types of schemes is dependency ratio mostly relevant? Explain c) What is the

Draw the total expenses vs. time curve, For the set of activities shown in ...

For the set of activities shown in the table below, draw the total expenses vs. time curve using the following data: The labor rates are as follows: Labor # 1 (L1) rate = 30

Selection of remuneration policy, Selection of Remuneration Policy Th...

Selection of Remuneration Policy The alternative of a suitable remuneration policy through a company will depend, with another thing, on: 1. Cost: the extent to that the p

Future value of single or multiple cash flows, Do your experts provide Futu...

Do your experts provide Future Value of Single or Multiple Cash Flows assignment help? I need urgent help in my college assignment.

Long term lenders - measuring business performance, Long Term Lenders - Mea...

Long Term Lenders - Measuring Business Performance Long term lenders These involve finances with loans, mortgages and debenture holders.  These have both short and long

5 problem excel on time value concepts, How quickly could something like th...

How quickly could something like this be done? And how confidential is this? Has any student ever been caught using this service?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd