Inventory Models & Waiting Lines
We discussed a solution
to the question of “how
much to order?“. This
section describes the
solution for “when to
place an order?“.
When to Order?
In the previous session, the
model assumed the
procurement lead time, L, is
zero. This is not true always.
Therefore, we relax the lead
time assumption to make the
model more realistic.
Lead time: Procurement lead time is the time between order placement and order
At the time of placing an order, the level of inventory on hand should be
such that it can satisfy the demand during the lead time. Clearly, this level
of inventory is a function of consumption during lead time. This level,
also referred to as reorder level (or reorder point), ROP, or r, can be
mathematically expressed as
𝑅𝑂𝑃 = 𝐷 × 𝐿
A reorder point (ROP) is a specific inventory level at which a new order is placed.
Example 3:
D = 7,200 units per year (assuming working days is 360 days a year)
L = 7 days
Q = 438 units
7200
𝑅𝑂𝑃 = 𝐷 × 𝐿= × 7=140 𝑢𝑛𝑖𝑡𝑠
360
EXAMPLE A firm sells an item that has an annual
demand of 1000 units. If the procurement
lead time is a constant 5 days, find the
reorder level. Assume 365 workdays a year
Since the annual demand is 1000 units, and the firm works 365 days a year, we can
compute the daily demand, which is
1000
¿ =2.74 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
365
Therefore, we have
𝑅𝑂𝑃 =𝐷 × 𝐿=2.74 ×5=13.7 𝑢𝑛𝑖𝑡𝑠
In the previous examples, the lead time was less than the cycle length.
But sometimes, because of the long distance between the supplier and
company or anything else, the lead time can be longer than the cycle
length. Therefore, we can use the following equations to determine the
value of ROP:
𝑹𝑶𝑷 = 𝑫𝑳− 𝒎𝑸
𝑚=
𝐿
𝑇 [ ] [ 2.5 ]
Integer number that is less than the original number calculated
Floor function
2
There are 2 situations for ROP based on the length of lead time:
𝑳< 𝑻
𝑚=
𝐿
𝑇[ ]
=0 → 𝑅𝑂𝑃= 𝐷𝐿 𝑄∗
𝑚=0
𝑳≥𝑻
𝑄∗
𝑚=
𝐿
𝑇[ ]
=1,2 , … → 𝑅𝑂𝑃 =𝐷𝐿−𝑚𝑄
𝑅𝑂𝑃 𝑚=1
The number of complete cycle
lengths that an order is pending to be
received 𝐿
EXAMPLE A company sells a type of item that has an
annual demand of 1,000 units. It buys each
item for $20 from the supplier. The ordering
cost is $40 per shipment and the holding cost
is $2 per item per year. If the lead time is 108
days and there are 360 working days in a
year, please determine the value of ROP.
Solution of Example 5:
• is 1000 items per year.
• h is $2 per item per year.
• C is $20 per item.
• L is 108 days or year; (a year has 360 working days)
• A is $40 per order.
The economic order quantity
∗
𝑄 =
√ √
2 𝐷𝐴 2×10 00× 40
h
=
2
=200 items 𝑇=
𝑄∗
𝐷
=
200
1000
=0.2 year
∗
𝑅𝑂𝑃 =𝐷𝐿 −𝑚 𝑄 =1000 × 0.3 −
0.3
0.2 [ ]
×200=300 − [ 1.5 ] × 200=100 items
EXAMPLE A firm sells an item whose annual demand is
5000 units. The annual holding cost is $5 per
unit. Also, the ordering cost is $50. If the
procurement lead time is a constant 50 days,
find the reorder point. Assume 360 workdays
a year.
The economic order quantity
∗
𝑄 =
√ √
2 𝐷𝐴 2×50 00×50
h
=
5
=316.2items 𝑇=
𝑄∗ 316.2
𝐷
=
5000
=0.06 year
Lead time is 50 days or year; 𝐿 >𝑇
EXAMPLE A company sells 6,000 units per year and follows an Economic
Order Quantity (EOQ) model. The following data is provided:
Annual demand (D) = 6,000 units
Holding cost per unit per year (h) = $4
Ordering cost per order (A) = $60
Lead time (L) = 45 days
Working days per year = 360
Question:
Calculate the Economic Order Quantity (EOQ).
Compute the cycle time (T).
Determine the Reorder Point (ROP) assuming 𝐿<𝑇
