What is Order Point, Safety Stock, Line Point and Reorder Target in Inventory Management?

The order point is the daily usage rate times the number of days lead time plus safety stock to accommodate unevenness in demand. Graham recommends putting the safety stock at an additional fifty percent. Bodenstab recommends multiplying the mean average deviation by a safety factor to produce a desired order fill rate. For example, for a 90 percent order fill rate the mean average deviation is multiplied by 1.6, for 95 percent by 2.0, for 97 percent by 2.4, and for 98 percent by 2.6. Key inventory items are set at higher target fill rates than less-important inventory items. Bodenstab’s calculation involves not just lead time but also an estimate of order frequency. Schreibfeder explains a number of methods to determine safety stock.

Line point is the order point plus the amount of inventory expected to be sold during the order lead time. When an order is being placed, any item whose stock level is below its line point should be ordered. Bodenstab’s reorder target, a similar concept to the line point, again incorporates an estimate of order frequency into the equation.

Minimums and maximums are used in many ways and, in some software systems, not at all. In some software systems the minimum is the same as — or one more than — the line point or reorder target. For items with sporadic sales, the minimum might be the size of a typical order. Maximum represents the most that should ever be in stock.

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