Order point

Order point
See also
Bin card Cycle stock Reorder level Inventory record Batch cost Merchandise inventory Buffer inventory Maximum stock level Inventory value

Order point is one of the most popular methods in the logistic materials management. It takes into consideration items in stock and open orders and in some cases, minus distributed number of items. In the case when that number is counted does not exceed the estimated order point, orders are formed to refill the supply. Usually the order point should be computed as medium usage within the process of the refilling lead time and adding to this: safety supply, or quantity of the order, or earmarked supply(B.J. Hamrock, R.S. Schmid, B.O. Jacobson 2011, p. 286).

Order point methods

At that moment when the constituent element of the statistical replenishment is estimated, inventory planners can choose the selecting alternative among four main methods. That techniques might be parted on two categories leaning on some consideration. This consideration should answer on the question: at what moment goods are considered to be probably refilled. These methods, that include min/max order point and general order point, are contingent on the uninterrupted review cycle. Other two methods, that include line point and period order quantity, are accepted in the role of the periodic review of ordering structure(D. F. Ross 1995, p.288). One more type of the point method is the scheme is this one that is applied quite often for the control of the allocated inventory(P. Schönsleben 2007, p.550).

Statistical order point

The order point should be estimated due to such calculation(D. F. Ross 1995, p.288):

Order Point = Expected demand in the course of the lead time + level of the safety stock.

The established refill amount is booked in the moment when the inventory level for the set goods decreases to the level under the order point. The level of the inventory more than the net margin is used as the start movement. The level of the inventory is considered to be the correct amount as it contains the approachable inventory adding whole inventory on-order. In the situation when the inventory that was approachable - got used, refilling orders might be located for the supply that is already booked. That situation causes magnifying of the stock(D. F. Ross 1995, p.288).

The best way to use statistical order point is that one where it will be availed oneself with irrespective demand things. It will help to expose not big changeability of the utilization. The point of the technique concentrates on the uncomplicated supposition: next customer demand might probably bear a resemblance nearly with previous demand. In such method is expected that lead times and historic utilization should be incessantly examined by the inventory planners. That's why variations of the demand that are summoned with sales promotions, overall economic circumstances, tendency and season might be discovered in the computation of the order point(D. F. Ross 1995, p.288).

Min-max order point systems

In the system of minimum and maximum the statements are(P. Schönsleben 2007, p.550):

• the minimum is always the order point
• the maximum is the horizon of the inventory stage.

The amount of the order is changeable and, moreover, it is an outcome of the maximum without material inventory and without the planned delivery. The order should be done in the situation when the total number of material inventory and planned delivery is under the minimum stage. The superiority of the technique of the reorder relies on the comprehensible determination of the peak repository space demands. Especially it is significant for the stillage and shelving in the big shops(P. Schönsleben 2007, p.550).

Single order point system

The scheme of the single order point does not take into the consideration such statement that the order occurs in a network and supposes that every component in the delivery structure is irrespective from whole other elements. Such irrespective actions can lead to the enormous oscillation. Usually the reason of such oscillation is the phenomenon that has the name “lumpy demand” on the forward step down of the delivery network. The lumpy demand appears because of the absence of the exchanging of information(news) and timing among producers, stocks, retailers and delivery.

Double order point system

The scheme of the double order point accepts two stages in the delivery structure. That's why it is called “double”(S. R. Vallabhaneni 2015, p.100). In the structure of the double order point is not one but two order points(P. Schönsleben 2007, p.550):

• The most little one is equated to the conventional order point. It comprises the demand prognosis in the process of the refill lead-time.
• The supreme order point contains the total amount of the beginning order point with the expected number of the demand, in the moment when the refilling lead time of the previous structural stage. In many cases it is also the lead time of the production or purchasing process.

In the situation when the delivery is estimated in a lead time from the producer stocks for 2 weeks, but the stock of the plant refill stocks for 3 weeks, the reorder point will be estimated as 4 weeks. In comparison to the single order point, it will not generate lumpy demand. The privilege of that system is decreasing the chance of the reserve. However, the minus is enhancing of the safety supply(S. R. Vallabhaneni 2015, p.100).

Economic Ordering Quantity

Considering the estimated order-number structure, an optimal level of every good in the inventory is established. An estimated order point and set amount that should be ordered are calculated for every product by the formula - Economic Ordering Quantity. The stages of the inventory fall down if the company trade with inventory goods or utilize them. In that case when that point is achieved, the EOQ, are acquired(C. Nieuwenhuizen 2007, p.168).

Examples of Order point

1. Reorder Point: The reorder point is the predetermined level of inventory that triggers an order for more inventory. This point is usually determined by estimating the amount of inventory needed to cover customer orders and other demands while avoiding stockouts and allowing time for the new inventory to arrive.
2. Economic Order Quantity (EOQ): The economic order quantity (EOQ) is a model used to calculate the most cost-effective amount of inventory to order. This model considers the cost of ordering and holding inventory, as well as the cost of stockouts.
3. Safety Stock: Safety stock is a buffer between the order point and the amount of inventory needed to prevent stockouts. It is used to account for uncertainty and unexpected changes in demand.
4. Lead Time: Lead time is the amount of time it takes for the supplier to deliver inventory, from the time the order is placed until the inventory is received. This factor is taken into account when determining the order point.

Advantages of Order point

One of the greatest advantages of Order Point is its ability to ensure that the stock levels of a company are kept steady and sufficient to meet any sudden or unexpected demand. This is done by calculating and setting an order point, which is the level of stock at which an order is placed to replenish the existing stock. Some of the advantages of using Order Point include:

• The ability to accurately forecast future stock levels and demand. Order Point takes into account the lead time for ordering and allows for a certain amount of safety stock to be kept in reserve. This enables companies to accurately predict future stock levels and be prepared for any sudden shifts in demand.
• Improved inventory control. Order Point allows companies to maintain minimum stock levels that are sufficient to meet customer demand. This prevents companies from having too much or too little inventory on hand, which can lead to inefficient use of resources and money.
• Lower costs. Order Point helps companies reduce the costs associated with ordering and storing inventory. By accurately predicting future demand and keeping stock levels to a minimum, companies can save money on ordering and storing inventory.
• Improved customer service. By accurately forecasting future demand and keeping stock levels at a minimum, companies can ensure that they always have enough inventory to meet customer demand. This allows companies to deliver goods and services on time and improve customer satisfaction.

Limitations of Order point

• The order point system is limited in its ability to accurately predict the exact amount of stock that is needed. This is because it is based on averages and does not take into account any variations in demand or supply.
• The order point system does not account for external factors such as the availability of materials, production delays, transport delays and seasonal fluctuations.
• The order point system does not take into account the cost of carrying inventory, which can be a substantial expense for businesses.
• The order point system does not always account for the unique needs of each customer and can result in overstocking or understocking in certain cases.
• The order point system relies heavily on accurate forecasting and demand data, which can be difficult to obtain and is subject to errors.

Other approaches related to Order point

One of the approaches related to order point is as follows:

• Safety Stock: This approach involves maintaining an additional quantity of items in the inventory in order to counter unexpected demand or supply fluctuations. It is necessary to ensure that the inventory level is always sufficient to meet the customer demand.
• Reorder Point: This approach involves setting a specific quantity or level of inventory when an order should be placed for the supply of items. This is usually calculated by taking into consideration the lead time for replenishment, usage rate of the item and the safety stock.
• Order Quantity: This approach involves determining the quantity of items to be ordered when the reorder point is reached. This is usually calculated by taking into account the cost of ordering and the cost of carrying items.
• Earmarked Inventory: This approach involves maintaining a specific quantity of inventory for specific customer orders or production orders. This ensures that the inventory is available when needed and enables faster turnaround time.

In conclusion, order point is an important approach in the logistic materials management and requires the consideration of other related approaches such as safety stock, reorder point, order quantity and earmarked inventory. All these approaches are related and need to be taken into account in order to make sure that the inventory levels are sufficient to meet the customer demand.

References

• Chang H. C. , Ouyang L. Y.(2002), Lot size reorder point inventory model with controllable lead time and set-up cost, International Journal of Systems Science, No 8, London, p. 635-642.
• Hamrock B.J., Schmid R. S., Jacobson B. O(2011), Integral Logistics Management: Operations and Supply Chain Management Within and Across Companies, CRC Press, London, p. 286.
• Nieuwenhuizen C.(2007), Business Management for Entrepreneurs, Juta and Company, Cape Town, p. 168.
• Ross D. F. (1995), Distribution: Planning and Control, Springer Science & Business Media, Norwell, p. 288.
• Samanta P. (2015), Introduction to inventory management, Berhampur, p. 18.
• Schönsleben P.(2007), Integral Logistics Management: Operations and Supply Chain Management in Comprehensive Value-Added Networks, Auerbach Publications, New York, p. 550.
• Tenorio J. I., Izar J.M., Harnandez-Molinar R.I.( 2018), Calculation of the Reorder Point for Items with Exponential And Poisson Distribution Lead time Demand, International Journal of Engineering Research and Development, no 01, p. 12-21.
• Vallabhaneni S. R.(2015), Wiley CIAexcel Exam Review 2015 Focus Notes, Part 3: Internal Audit, John Wiley & Sons, Hoboken, p. 100.

Author: Bartłomiej Borówko