Inventory Control

Asked April 2, 2014, 2:23 PM EDT

Demand for an item is constant at 40 units a week, and the economic order quantity is calculated to be 100 units. What is the reorder level if lead time is constant at 4 weeks? What is the effect of adding some margin of safety and raising the reorder level by ten units? What happens if the lead time (a) falls to 2 weeks or (b) rises to 6 weeks?

Puerto Rico running a business business management

1 Response

The questions you raise are perfect reasons why business owners need to gather and use data. If demand is 40, why would you want to increase to 50? This brings in increased supplies, productions costs, inventory costs, etc - higher costs with no increased revenue. And some of those units may get old over time. You didn't indicated anything about increased marketing or reason for why those units might be needed Now you may be gearing up for a plant maintenance break or vacations or you think shipping will be slower or a seasonal rush is coming but that is unclear.

Yes this does provide some margin of safety so maybe you want a slightly higher level of 42 units and then for only a couple of weeks might be the more efficient alternative.

You then mention changes in lead time, increase or decrease? Why might this be happening. This is why the business owner must stay attuned to trends and watch those sales figures closely to try and map out what might be happening. It also means a comparison with previous years.

There is no answer to your question but it drives home the point of watching and listening to internal data as well as the external situation.