•Inventory status is reviewed to determine replenishment needs.
•Implemented through a reorder point and order quantity.
¨ROP= D x T + SS, where
•ROP= reorder point in units
•D= average daily demand in units
•T= average performance-cycle length in days
•SS=safety or buffer stock in units.
•The following are considered in perpetual review:
-On hand inventory represents quantity that is physically present in the particular distribution facility.
-On-order inventory represents quantities that have been ordered from suppliers.
-If on-hand plus on-order quantity is less than or equal to the established reorder point, inventory control process will initiate another replenishment order.
-Mathematically, this can be stated as
-If I+q £ ROP then order Q, where
(a)I= inventory on hand
(b)q= inventory on order from suppliers
(c)ROP = re-order point in units
(d)Q= order quantity in units.
•Average inventory level for a perpetual review system is calculated as
(a)I = Q/2 + SS, where
-I= average inventory in units
-Q= order quantity in units, and
-SS= safety stock in units
•The assumption is that P.O. will be placed when the reorder point is reached and there is a continuous monitoring of inventory system.
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