REORDER POINT (ROP) ECONOMIC ORDER QUANTITY, (EOQ) Abdel Fatah Afifi

Will Your Role Include Inventory Management? A big trend is for organizations to blend their operational functions under the umbrella known as supply chain management. Often, the first two functions to merge are Purchasing and Inventory management 2

How much inventory to have on hand?  First, you must know how much inventory to have on hand to ensure continuity of supply in the event of an uncharacteristic increase in either demand and/or lead time. This quantity of inventory is called the safety stock. There is no universally used formula for determining safety stock quantity, 3

When to reorder materials for inventory?  Second, you must know when to reorder materials for inventory. Generally, this point in time is determined when the quantity of materials in stock decreases to a certain level, called the reorder point. 4

The reorder point is determined by the formula : ROP = SSQ + (QUD x ALT) Where, ROP = Reorder Point SSQ = Safety Stock Quantity QUD = Quantity Used Daily ALT = Average Lead Time (in days) 5

how much to order?  Third, you must know how much to order. A complex mathematical equation determines the Economic Order Quantity, or EOQ 6

Economic Order Quantity, or EOQ  The equation recognizes the tug of war between acquisition costs and inventory carrying costs:  When you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels.  Conversely, When you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering.  The EOQ is the order quantity that minimizes the sum of these two costs. 7

the EOQ formula: EOQ = Economic Order Quantity ACPO = Acquisition Costs Per Order AUU = Annual Usage in Units UC = Unit Cost CCP = Carrying Cost Percentage 8

Example:  If you know that it costs you $150 in overhead per order, you use 5,000 widgets a year, you pay $200 per widget, and your Finance Department tells you that annual carrying costs are equal to 20% of the value of the goods in stock,  How much you should order?  194 widgets at a time. 9

 EOQ = Economic Order Quantity = ??  ACPO = Acquisition Costs Per Order = 5000  AUU = Annual Usage in Units = 150  UC = Unit Cost = 200  CCP = Carrying Cost Percentage = 20%  2*5000*150 =  200*20% = 40  /40 = SQ.Roots = =