# 11.3.1b Order Point Calculation

### Intended learning outcomes: Explain the (re-)order point calculation. Identify the criterion for the release of a production or procurement order.

Continuation from previous subsection (3.3.3)

The order point, or reorder point (ROP), is calculated from safety stock and expected (forecast) demand during the procurement period according to the formula in Figure 11.3.1.3.

Fig. 11.3.1.3       Order point calculation.

Exercise: Get used to the order-point calculation by chosing different values for the parameters as well as the monthly gross requirements.

Calculation of the order point is executed after calculation of the demand forecast and always at the end of a statistical period. Order point calculation should be executed more frequently in cases of discontinuous demand, longer statistical periods, and shorter lead times, because the forecast may change significantly over the course of time.

In addition to physical inventory, also scheduled receipts cover the demand during the lead time. These include firmly or released ordered quantities (see the definition in Section 12.1.1), since these will all arrive during the lead time. If the formula contained in Figure 11.3.1.4 holds, a new production or procurement order should be released.

Fig. 11.3.1.4       Criterion for the release of a production or procurement order.

For management purposes, a periodically produced list contains each the items for which the criterion in Figure 11.3.1.4 is satisfied, together with an order proposal that contains all the required information, such as the predicted receipt to stock, the batch size, and information regarding earlier productions or procurements. Such an order proposal also serves to specify purchase blanket orders more precisely. Since the procurement decision must be made without delay, the proposal also contains bids from suppliers.

## Course section 11.3: Subsections and their intended learning outcomes

• ##### 11.3 ROP (Re)-Order Point Technique, and Safety Stock Calculation

Intended learning outcomes: Explain the (re-)order point technique and variants thereof. Describe the safety stock calculation with continuous demand. Disclose the determination of the service level and the relation of service level to fill rate.

• ##### 11.3.1 The ROP (Re)-Order Point Technique

Intended learning outcomes: Present in detail characteristic data for the (re-)order point technique.

• ##### 11.3.1b Order Point Calculation

Intended learning outcomes: Explain the (re-)order point calculation. Identify the criterion for the release of a production or procurement order.

• ##### 11.3.2 Variants of the Order Point Technique

Intended learning outcomes: Identify the criterion for the release of a production or procurement order, if the customer allows a minimum delivery lead time. Explain the criterion for an early issuance of a production or procurement order.

• ##### 11.3.2b The Min-Max Reorder System and the Double Order Point System

Intended learning outcomes: Produce an overview on the min-max (reorder) system. Describe the double order point system.

• ##### 11.3.3 Safety Stock Calculation with Continuous Demand

Intended learning outcomes: Describe different techniques for determining safety stock. Identify different patterns of the deviation of demand from forecast.

• ##### 11.3.3b Service Level, Safety Factor, and Service Function

Intended learning outcomes: Explain safety stock in relation to service level. Identify the safety factor and the service function.

• ##### 11.3.3c Safety Stock Calculation with Continuous Demand Following a Normal Distribution

Intended learning outcomes: Disclose the normal integral distribution function (service function) to determine the safety factor that corresponds to a desired service level. Present the formula for safety stock.

• ##### 11.3.3d Safety Stock Calculation with Continuous Demand Following a Poisson Distribution

Intended learning outcomes: Disclose the Poisson distribution integral function to determine the safety factor that corresponds to a desired service level.

• ##### 11.3.4 Determining the Service Level on the Basis of Stockout Costs

Intended learning outcomes: Describe the order point technique where the length of order cycle provided by the batch size is a multiple of the lead time. Explain the probability of stockout in dependency on stockout costs per unit.

• ##### 11.3.4b Determining the Relation of Service Level to Stockout Quantity per Order Cycle

Intended learning outcomes: Present the service function (of the stockout quantity coefficient) P(s) in dependency upon the safety factor s. Produce an overview on and examples of the relation between fill rate and service level.

• ##### 11.3.4c Determining the Relation of Service Level to Fill Rate

Intended learning outcomes: Produce an overview on and examples of the relation between fill rate and service level.