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Order Point System / Fixed
Order System
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Order point
system / Fixed Order quantity system of inventory control is based on the (Re)Order
point and Order quantity factors rather than on the time
factor. The inventory policy, in this system, is drawn
,defining the following:
Fixed Order point / Re-Order Level (ROL) for each item
Fixed Maximum , Minimum levels for each item
Fixed Quantity to be ordered
Often called Min-Max systems, these involve both a maximum
inventory level and a minimum at which reorders are generated.
Basically, units of an item are issued until the level of that
inventory reaches the predefined reorder point. An order is
then triggered for a predetermined quantity (usually a
calculated economic order quantity). In this system, the order
quantity is constant and the time between orders s variable.
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The different
Inventory points (Levels) of stock for an item
are :
Maximum level (Max.) , predetermined
Minimum Level (Safety stock, SS), predetermined
Lead time (LT) , predetermined
Monthly demand = D (often based on Moving average method)
MaxL.= (Review period + LT + SS) X D
Reorder level (ROL) = (LT + SS) X D
Order Quantity (OQ) = Max. – (Present stock + Pipeline dues) |
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Process : In course of consumption of an Inventory item , say,
in the form of issue from Stores to the users, the stock level
of the item starts depleting through its usage rate D.
As per
the above definition , the stock goes up to the maximum level
in the first replenishment and then, because of steady
consumption, comes gradually down. In that process ,again as
per the definition , it touches the ROL.
As soon as the stock
level touches the ROL fresh replenishment action is initiated.
It is presumed that the next lot shall arrive by the time the
present depleting stock touches the Safety stock , keeping a
stable Lead time and a stable usage rate D.
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In some places the Order quantity is decided by the above
formula whereas in some other places it is determined by the
Economic Order Quantity (EOQ) concept. That's whenever an
order is to be placed the quantity shall be EOQ. |
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Advantages
:
Each item is procured in the most economical quantity
An item is attended to only when it needs attention i.e. when its stock
has reached the ROL
Control can be exercised on Inventory w.r.t. Max & Min levels
Applicability of Order Point system :
Item must have a reasonable stable usage
Lead time should not have radical variation
Supplier should be able to accept irregularly timed and unscheduled
orders |
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Limitations of the system :
Needs continuous monitoring of stock level of each item
Cumbersome to operate for items with unstable usage and lead time
Perpetual inventory records are required |
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