I think I understand the Safety Stock and the reorder point from your sample spreadsheet. We presently use a Min/Max system. If I understand this correctly the reorder point would be the Min. Is that correct? What is the Max amount of inventory? Does the system provide a calculation for the amount of inventory to order. We presently use EOQ = SqRt [(2 * Demand * Ordering Costs) / Holding Costs] for the order quantity.
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Yes, the reorder point is frequently named MIN in inventory management software. Your interpretation is correct. The MAX frequently represents the reorder quantity. Yet, those MIN / MAX values are a bit misleading, but the fundamental assumption behind them is that those values are static instead of being dynamically adjusted with the future demand. Your formula is the Wilson EOQ formula published in 1913 that express a tradeoff between a flat shipping cost and storage costs. Note that this formula comes with very very specific assumptions on replenishment model. For modern retailers, those assumptions are likely to be just plain wrong. For example, product expiration or obsolescence matters usually much more than storage costs. See Refreshing Min/Max inventory planning for further details. |
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Economic Order Quantity EOQ is a very old calculation based on the direct cost of placing the order and the carrying cost of holding the inventory. I am not sure it is the best method. I personally like the idea of using a projection. Beyond the assumption and weaknesses you describe, these cost are very difficult to obtain. Each cost brings with it a whole new set of assumptions and at times guesses. |
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You are correct. The time Min/Max is generally assumed to be static. However we are wanting to make the Min/Max dynamic using LSSC. The Min seems to be fairly obvious. It is the the Safety Stock + Lead Time Demand. The question for us is how to model and then calculate the Re-order Qty so that is takes into consideration the following: projected sales, fixed order cycle, lead time, minimum orders, case qty, carrying costs, freight, order cost, etc... There may be other cost but these are the most obvious. |
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