Question

Explain the following with example and formula-

a) E0Q

b) SAFETY STOCK

c) LEAD TIME

d) RE-ORDER POINT

Answer 1

A. EOQ

EOQ (Economic Order Quantity) is the ideal size of orders after considering the ordering cost and carrying cost if the inventory.

Under Economic order quantity, the ordering and carrying cost is minimum, and total ordering cost is equal to total carrying cost.

Formula: square root of (2× annual usage units× cost of placing order per unit) / yearly carrying charge.

Example: suppose a retail footwear shop requires 1000 pairs annually, and it costs $2 per pair to place an order and $5 as holding cost, then the EOQ will be 28.3.

The shop required 28 shoes as an ideal order size.

B. Safety stock

Safety stock is the extra quantity of inventory held by any business or organization to reduce the risk of getting out of stock.

Formula: Order point- (Average Usage Rate× Average lead time)

Example: for any other shoe seller, if the order point of the shoes is 90 pairs, and average usage rate is five pairs, and average lead time is nine days, then the safety stock would be 45 units.

C. Lead time.

Lead time, for any producer, is the gap between placing an order and having the material ready for the production process.

Formula: supply delay+ reordering delay

Example: If the supply delay is two days, and the reordering delay is one day, then the lead time would be three days.

D. Reorder point

It is the minimum inventory point level, after reaching which, the producer reorder the inventory gets refilled.

Formula: minimum rate of usage× maximum lead time.

For example, if the minimum usage rate is nine pairs of shoes and the maximum lead time is ten days, then our reorder point would be 90 pairs of shoes.