Maintenance of Stock Levels
The next important point after determination of EOQ is to decide as to when the order for purchase should be placed. The answer is simple. The order for purchase should be placed when the stock is reduced by usage to the Order Point. The Order Point is one where the order should be placed for the economic order quantity. For deciding Order Point, two things, viz., (1) Lead time and (2) Usage during Lead time, are the determining factors. Lead time is the supply time, or to be more specific, Lead Time is “the time interval between placing an order and having materials on the factory floor ready for production…”
Usage means the sue of materials by consumptions for productions, or the stock of finished goods sold.
Sometimes purchase are made in large bulk in a season if the goods are seasonal, i.e., available in one season only, or at a time when it is feared that the goods may not be found available in the near future due to some reason.
Special items for which no limit or order-points are fixed may be purchased as and when needed.
To avoid over-stocking and under stocking each items of the inventory has the Maximum Level. Minimum Level and an Order point.