Order point method

The order point corresponds to the inventory level which, once reached, will trigger an order.

In case of regular consumption, the origin inventory decreases in a linear way, up to the safety stock, which will be reached at the end of a given t time.

In order not to consume the safety stock, the order has to be made in a way that at t time, the inventory is again at its original level.

The order point, corresponding at the inventory level which trigger the order, allows the demand satisfaction without consuming the safety stock, during a period going from the order date to the delivery date.

At the end of the procurement time, the order is delivered and the inventory supplied.

This method is also called "min max inventory control".

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• The order point (S) is calculated the following way:

S = km ( d + dS_s )

S =    Order Point

km =  Average consumption

       =  Q/ t

       Q quantity in inventory after the supplier's delivery – Safety Stock S_s

        t time necessary to consume Q

d =    Procurement time

dS_s = Safety stock expressed in time

• The quantity to order (Q) is calculated the following way:

Q = Km .

Q =   Economic quantity to order

K =   Annual consumption

Ca = Acquisition cost

Pu = Unit price (or order price)

C =   Holding rate

• The economic number of orders (N) is calculated the following way:

N =

K =   Annual consumption

Pu = Unit price (or order price)

C =   Holding rate

Ca = Acquisition cost

Kanban mechanism is close to the order point method (See spec sheet Free-logistics.com © Kanban ).

Recommended bibliography