Imagine for a moment that you own a sports shop and you need to regularly order baseball bats from a factory which you sell to your own customers. However, on some months, you run out of baseball bats to sell. On other months, you still have unsold baseball bats at the end of the month yet your monthly delivery still comes. As a result, you end up with too many unsold baseball bats. In the past, you tried to remedy this problem by ordering only when your stock had run out. Unfortunately, you then encountered another problem. You found out that every time you ordered a new batch, it took 5 days for the delivery to come. Therefore, you ended up with 5 days of nothing to sell which resulted in lost sales opportunities.
Thus, a big question still remains. When is the right time to order a new batch of baseball bats so that you almost never run out? When you're down to your last 10 baseball bats? Or maybe, when you're down to your last 20 baseball bats?
Thus, a big question still remains. When is the right time to order a new batch of baseball bats so that you almost never run out? When you're down to your last 10 baseball bats? Or maybe, when you're down to your last 20 baseball bats?
The exact number you're looking for is known as your ROP or Reorder Point Formula. For example, if your reorder point is 10 bats, this means that you should immediately place an order for a new batch of baseball bats whenever you're down to your last 10 baseball bats in the store. If you do this consistently, you should almost never run out of bats and you will rarely have too much inventory in the store.
To find out the Reorder Point Formula, people use the reorder point formula. However, there are plenty of free online calculators which will let you compute your Reorder Point Formula quickly and instantly, so there is usually no need to calculate it yourself unless you are required to do so in an exam.
EOQ or Economic Order Quantity Model
Different from the Reorder Point Formula mentioned above, this next concept answers the question on whether it is better to buy in bulk or in small amounts. Normally, we say it's always better to buy in bulk, because we usually get a volume discount.
However, it is important to first determine the following:
To find out the Reorder Point Formula, people use the reorder point formula. However, there are plenty of free online calculators which will let you compute your Reorder Point Formula quickly and instantly, so there is usually no need to calculate it yourself unless you are required to do so in an exam.
EOQ or Economic Order Quantity Model
Different from the Reorder Point Formula mentioned above, this next concept answers the question on whether it is better to buy in bulk or in small amounts. Normally, we say it's always better to buy in bulk, because we usually get a volume discount.
However, it is important to first determine the following:
- the volume discount,
- the amount which needs to be purchased before a volume discount is given,
- the price of the item if smaller amounts are purchased without the volume discount,
- the storage cost of the goods.
After these have been determined, we can use the EOQ Economic Order Quantity Model (or formula) to find out the ideal quantity to buy "each time" in order to achieve the lowest possible cost. Just like in the case of our first concept above, there are a lot of free online calculators on the internet which you can use to calculate this figure instantly, so there is no real need for you to do the calculation yourself unless you are required to do so in school.
Wayne Mckay is the creator of inventoryskills. com, a free online tutorial website for lots of MBA courses and business school topics. Go to This Website and learn how to calculate Reorder Point from the super quick and easy video Reorder Point Formula in 15 minutes.
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