Question

Annual demand for the notebook binders at Duncan’s Stationery Shop is 10,000 units. Dana Duncan operates her business 300 days per year and finds that deliveries from her supplier generally take 5 working days.

a) Calculate the reorder point for the notebook binders that she stocks.
b) Why is this number important to Duncan?

Answer 1

(a)

Annual demand (D) is 10,000 units.

Number of Working days \(=300\) days per year

Lead time \(=5\) working days.

Calculate the Re-Order Point (ROP) using the following formula:

ROP \(=\) (Demand per day) \(\mathbf{x}\) (lead time for a new order in days)

$$ \mathbf{R O P}=\mathbf{d} \mathbf{x} \mathbf{L} $$

Where,

$$ \mathrm{d}=\frac{\mathrm{D}}{\text { Number of working days }} $$

Substitute the values in equation (1)

$$ \begin{aligned} \operatorname{ROP} &=\frac{\mathrm{D}}{\text { Number of working days }} \times \text { Lead time } \\ &=\frac{10,000}{300} \times 5 \\ &=166.6 \\ & \approx 167 \text { units } \end{aligned} $$

Thus, the Re-Order Point (ROP) is 167 units.

(b)

The inventory should not go beyond 167 units. When level of inventory goes beyond 167 , the company will not have enough inventories to meet daily sales demand of the customer which is around 33 units per day. It means that company will be in a position of stock out. To avoid this company has to place an order for notebook binders, as it will take 5 days to arrive at the shop