Managing Inventories—Reorder Point Systems
7 Pages Posted: 21 Oct 2008
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Managing Inventories—Reorder Point Systems
Abstract
This note introduces students to the replenishment-inventory management framework, concepts, and tools.
Excerpt
UVA-OM-0936
MANAGING INVENTORIES—REORDER POINT SYSTEMS
Inventories account for a significant percentage of the current assets of companies in industries ranging from hospitals and restaurants to manufacturing, wholesaling and retailing firms. So, managing inventories is often the key aspect of improving a firm's working capital position and its return on assets. An inventory-management system is a set of procedures for managing the items in inventory. The focus in this note is on one such system—the Reorder Point System. Other inventory management systems and concepts have been addressed in separate technical notes.
The selection of a system for an item or group of items depends, in part, on the type of demand experienced by the item. There are two basic types of demand, forecast demand and scheduled requirements demand.
Forecast Demand
Orders may arrive at unpredictable intervals and call for quantities whose magnitude cannot be precisely predicted ahead of time. Examples of such orders include service parts orders, distributor orders placed upon a factory warehouse, or customer demand at a retail facility. When the arrival time and quantity required for each order are unknown, stocks must be held in anticipation of demand. The principal management concern is to maintain the proper quantity of each item held—given that too much stock absorbs a disproportionate share of the firm's assets, and too little stock reduces customer service. Forecasts are thus necessary and must be based on historical order rates and anticipated changes in future usage.
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Keywords: control systems, inventory management, operations, supply chain managment, reorder point systems
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