Reorder Point and Target Level

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The system based on the information level assumes that an order is placed at a time when the level of available stock is lower than or equal to the so-called information level (ROP or Reorder Point). Available stock is understood as stock amount increased by already placed orders and decreased by products available or allocated to specific sales orders.

The restocking process in the information level ordering system is shown in Figure 1.  The black solid line in the figure represents the physical stock in the warehouse minus the products disposed of or allocated to sales orders. The red dotted line represents the stock available.

Figure 1. Graphic illustration of the restocking process in an information-based ordering system.

In this model it is assumed that placing an order is possible at any time. It should be possible at any time to determine the level of available stock or at least to establish whether the available stock has fallen below the information level. The purchase order is placed when the available stock is smaller than or equal to the calculated ROP level. The order is placed in a specific quantity of Q, according to the Economic Order Quantity (EOQ) described later in this subchapter.

In an information-based stock replenishment model, ROP is determined according to the formula:

where:

D – average sales in the unit of time adopted for measurements.

LT – lead time,

SS – the safety stock calculated according to formula (SS = ω * σ DLT).

An information-based system is most often used in cases where there is a possibility to place an order at any time or where the size of the order is pre-determined. It allows to minimize the costs of renewal and maintenance of stock thanks to the possibility of using the Economic Order Quantity. This method also enables a quick response in the event of a sudden increase in demand.

While using this method of stock control, one should pay attention to the risk resulting from the assumption that an order is placed exactly at the moment when the level of available stock is lower or equal to the level of ROP. In fact, releases from the warehouse are usually not continuous, but discreet (e.g. in pallets).
As a consequence, an order may be placed when the level of available stock is much lower than ROP. If the risks described above are present in a given company, it is necessary to build up additional stock to prevent shortages [Rim, Noh and Hyun 2011].

In the literature on the subject, there are numerous developments of this method and examples of its adaptation to specific cases, for example:

  • a logistics system in which delivery time is correlated with demand [Wang, Zinn and Croxton 2010],
  • a logistics system in which order quantity and ROP levels are interlinked [Gross and Ince 1975; Cobb 2013],
  • the determination of the level of ROP taking into account the costs of the lack of products in the warehouse [Aucamp 1986],
  • determining the level of ROP in a model in which delivery time is described using an exponential distribution [Hayya and Harrison 2010],
  • determining the level of ROP, when the delivery time depends on the size of the order [Al-Harkan and Hariga 2007],
  • the determination of ROP levels for aeronautical parts subject to specific service periods [Ghobbar and Friend 1996].

The second classic model of inventory control is the system based on the periodic review [Sarjusz-Wolski 2000]. The process of restocking in this system is shown in Figure 2. The black solid line in the figure represents the physical stock in the warehouse minus the products disposed of or allocated to sales orders. The red dotted line represents the stock described with the black line increased by the orders placed.

Figure 2. Graphic illustration of the restocking process in a periodic review-based ordering system.

The periodic survey model assumes that the stock review is carried out in the fixed, predetermined cycle T0. During the inventory survey, a purchase order is placed and it constitutes the difference between the calculated level of the so-called maximum stock and the available stock. The delivery is made after a specified period of time in the stock replenishment cycle T.

The maximum stock level (referred to as target level) is calculated according to the formula [Cyplik 2001]:

where:

D – average sales in the unit of time adopted for measurements.

LT – lead time,

T0 – review cycle,

SS – safety stock calculated according to the formula:

where:

 ω – safety factor being a function of the adopted level of customer service,

σ D – standard deviation of sales in the time unit used for measurements,

LT- lead time,

T0 – review period,

σ LT – standard deviation of the lead time,

D – average sales in the unit of time adopted for measurements.

The periodic review model is most commonly used when stock replenishment at the information level is inefficient or impossible. It is often the case that, due to contracts with suppliers, orders can only be placed within a certain period of time. Sometimes it also happens that the company is not able to determine the level of inventory available on an ongoing basis. An unquestionable advantage of this method of restocking is the possibility to reduce the costs of order execution by placing orders with one supplier at the same time. In the literature on the subject, one can find considerations concerning the adaptation of this model to specific cases and specific applications, for example:

  • a logistic system with two decoupling points [Cachon 2001],
  • a logistics system with open (non-executed on time) sales orders or shortages [Warrier and Shah 2009; Krzyżaniak 2014].

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Author of the article: Radosław Śliwka

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