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

Origination fees, jack needs to borrow $1000 for the next year. Bank south ...

jack needs to borrow $1000 for the next year. Bank south will give him the loan at 9%. Suncoast will give him the loan at 7% with a $50 loan orgination fee. First national will giv

Pursuing self esteem ambitions and creative accounting, Pursuing self estee...

Pursuing self esteem ambitions and Creative Accounting Pursuing power and self esteem ambitions This is called "empire building" to enlarge the firm via acquisitions and me

The income statement and the balance sheet, Conduct research and explain th...

Conduct research and explain the companies, their operations, locations, markets, and lines of business. Collect financial statements for the past three years, fiscal or calendar .

Gloria the Investor, Gloria the Investor Gloria is a seasoned sales manage...

Gloria the Investor Gloria is a seasoned sales manager with a very large international company. Although she has a great deal of experience with sales, she has little experience w

Real estate, A home buyer lists her home at a 7% commission rate and wants ...

A home buyer lists her home at a 7% commission rate and wants to net 45,000 after paying the mortgage balance of 68,000 and the broker''s commission. To the nearest dollar, what sh

Public limited companies, Public Limited Companies These are joint sto...

Public Limited Companies These are joint stock companies that have sold shares to specific public and thus have attracted public money in form of share capital.  Those compani

Fixed Exchange vs Flexible Exchange Rate, Critize the flexible exchange rat...

Critize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime

Individual or component costs of capital, flotation cost of 15% for bond, b...

flotation cost of 15% for bond, bonds 8%,$1,000 par value, 16 year maturity

PERDIEM CLAIM, how to make a perdiem claim format to maintain the records o...

how to make a perdiem claim format to maintain the records of staff

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