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Chapter 8

2.3 Calculating the reorder level (ROL) with known demand and lead time

Having decided how much inventory to reorder, the next problem is when to reorder.
The firm needs to identify a level of inventory which can be reached before an order
needs to be placed.

The ROL is the quantity of inventory on hand when an order is placed.

When demand and lead time are known with certainty the ROL may be calculated
exactly,

i.e. ROL = demand in the lead time.

2.4 ROL with variable demand or variable lead time

When there is uncertainty over demand or lead time then an optimum level of buffer
inventory must be found, which will depend on such things as the variability of
demand, the cost of holding inventory and the cost of stockouts.

The calculation for this is not needed for the exam.

Question 5

Re-order level

Using the data from the previous question, assume that the company adopts an
order level of 20,000 units and that the lead time from the supplier is four
weeks.

What is the reorder level?

How frequently (in weeks) will an order be made?

Demand in one week = 200,000/52 = 3,846 units.

Demand in the lead time = 3,846 × 4 = 15,384 units = re-order level.

Orders per year = 200,000/20,000 = 10

52/10 = 5.2

Orders will be made every 5.2 weeks.

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