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Reorder Point Worksheet

The document discusses reorder point (ROP) calculation in different situations. It explains that ROP is equal to expected demand during lead time plus a safety stock. The safety stock depends on the standard deviation of demand and lead time as well as the desired service level. It provides formulas for calculating ROP and safety stock in four situations: 1) fixed demand and lead time, 2) variable demand and lead time, 3) variable demand and fixed lead time, and 4) fixed demand and variable lead time. An example calculation is also shown.

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340 views6 pages

Reorder Point Worksheet

The document discusses reorder point (ROP) calculation in different situations. It explains that ROP is equal to expected demand during lead time plus a safety stock. The safety stock depends on the standard deviation of demand and lead time as well as the desired service level. It provides formulas for calculating ROP and safety stock in four situations: 1) fixed demand and lead time, 2) variable demand and lead time, 3) variable demand and fixed lead time, and 4) fixed demand and variable lead time. An example calculation is also shown.

Uploaded by

Mahira
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Reorder point

1. Lead time (LT) and demand (d) during lead time is steady.
ROP, Reorder point = d x LT
2. If both lead time and demand during lead time varies with time
Avg. Lead time = LT

Standard deviation of Lead time = σLT


Avg. demand = d

Std. Deviation of demand = σd

ROP = d x LT + z x SQRT(LT x σd2 + d2 x σLT2)


3. Fixed lead time with variable demand
LT

σ LT =0

d, σd

ROP = d x LT + z x SQRT(LT x σd2)

ROP = d X LT + z x σd x SQRT(LT)
4. Fixed demand with variable lead time
LT

σ LT

d,
σ d =0

ROP = d x LT + z x SQRT(d2 x σLT2)

ROP = d X LT + z x d x σLT

ROP = 300 + 2.33 x 30 = 370 units


Safety stock = 2.33 x 30 = 70 units

Solution:
a. Stock-out risk = 1%
Service level = 100 – 1 = 99%
Z (99%) = 2.33
Std. dev. of lead time demand, SDdLT = 30 units
ROP = Expected demand during lead time + z x SDdLT
= 300 + 2.33 x 30 = 370 units
b. Safety stock = z x SDdLT
= 2.33 x 30 = 70 units
c. Risk of stockout = 2%
Service level = 100 – 2 = 98%
Z (98%) = 2.06
Safety stock = 2.06 x 30 = 62 units
Safety stock is 62 units with 2% risk of stock-out, which is less
than ROP at 1% risk of stock out (70 units).
Re-Order Point (ROP)
Demand, d
Lead time, LT
Service Level, Z

Situation 1
Demand is fixed (no variation)
Lead time is fixed (no variation)

ROP = d x LT

Situation 2
Demand is variable
- Avg. demand = d
- Std. Dev. of demand = SDd
Lead time is variable
- Avg. Lead time = LT
- Std. dev. of Lead time = SDLT

ROP = Avg. demand x Avg. lead time + Z x SQRT (Square of Std. dev. of
demand x Avg. Lead time + Square of Std. dev. of lead time x square of avg.
demand)
ROP = d x LT + Z x SQRT(SDLT2 x d2 + SDd2 x LT)

ROP = Expected demand during lead time + Safety stock


Safety Stock = Z x SQRT (Square of Std. dev. of demand x Avg. Lead time +
Square of Std. dev. of lead time x square of avg. demand)
= Z x SQRT(SDLT2 x d2 + SDd2 x LT)

Situation 3
Demand variable
Lead time fixed
Demand is variable
- Avg. demand = d
- Std. Dev. of demand = SDd
Lead time is Fixed
- Lead time = LT
Std. dev. of Lead time = SDLT = 0

Situation 4
Demand Fixed
- Demand = d
- Std. Dev. of demand = SDd = 0
Lead time variable
- Avg. Lead time = LT
Std. dev. of Lead time = SDLT

Solution:
a. Safety stock = Z x Sdt. Dev. of demand during lead time
Stock out risk = 4%, Service level = 100 – 4 = 96%
Z (96%) = 1.75
Std. dev. of lead time demand = 52 pounds
Safety stock = 1.75 x 52 = 91 pounds
91 pounds of safety stock is appropriate

b. ROP = Expected demand during lead time + Safety stock


Lead time demand = 600 pounds
Safety stock = 91 pounds
ROP = 600 + 91 = 691 pounds
When there is a stock of 691 pounds of the item then it will be re-
ordered.
c. Safety stock would be zero if value of Z = 0, i.e., service level is 50%
(from one-tailed Z table). Then stock out risk = 100 – 50% = 50%
For a 50% risk of stock-out there would not be any safety stock.

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