A common technique used to determine when an item needs to be replenished is the order point system. The order point acts like an alarm alerting planners that the current inventory balance on an item has fallen below its trigger point quantity and needs to be replenished.
The formula for calculating the order point is expressed as follows:
Demand (D) × lead time (LT) + safety stock (SS) = order point (OP)
It is important to note that the order point technique is not designed for finished goods, raw materials, or components in a production environment.
Periodic Review
This technique is best used to manage items that cannot be effectively managed by continuous review techniques. The periodic review system is a fixed reorder cycle inventory model. The goal of this method is to establish a review cycle and an order-up-to target inventory quantity for each product. When the inventory is reviewed at the fixed cycle date, a replenishment order is generated with the order quantity calculated as the total inventory necessary to reach the target stock level.
Replenishment order quantity using periodic review is calculated with the following formula:
Order quantity (OQ) = Target inventory (TI) – on hand inventory (I)
Using the table, compare and contrast order point replenishment with periodic review replenishment.
|
Method |
Order Point |
Periodic Review |
|
Order quantity |
Fixed (based on lot size) |
Variable |
|
Order interval |
Variable |
Fixed |
|
Formula |
Demand during lead time plus safety stock |
Target inventory minus on-hand inventory |
|
Inventory data |
Demand 100 per week, safety stock is 200, lead time is 4 periods. Lot size is 1,000. |
On-hand inventory is 75. Interval is monthly. |
|
Example |
(100 × 4) + 200 = 600 |
600 – 75 = 525 |
|
Explanation |
When on-hand inventory is 600, order 1,000 |
Current month order 525 |