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REORDER POINT (ROP) ECONOMIC ORDER QUANTITY, (EOQ) Abdel Fatah Afifi

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Will Your Role Include Inventory Management? A big trend is for organizations to blend their operational functions under the umbrella known as supply chain management. Often, the first two functions to merge are Purchasing and Inventory management 2

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How much inventory to have on hand? First, you must know how much inventory to have on hand to ensure continuity of supply in the event of an uncharacteristic increase in either demand and/or lead time. This quantity of inventory is called the safety stock. There is no universally used formula for determining safety stock quantity, 3

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When to reorder materials for inventory? Second, you must know when to reorder materials for inventory. Generally, this point in time is determined when the quantity of materials in stock decreases to a certain level, called the reorder point. 4

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The reorder point is determined by the formula : ROP = SSQ + (QUD x ALT) Where, ROP = Reorder Point SSQ = Safety Stock Quantity QUD = Quantity Used Daily ALT = Average Lead Time (in days) 5

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how much to order? Third, you must know how much to order. A complex mathematical equation determines the Economic Order Quantity, or EOQ 6

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Economic Order Quantity, or EOQ The equation recognizes the tug of war between acquisition costs and inventory carrying costs: When you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels. Conversely, When you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering. The EOQ is the order quantity that minimizes the sum of these two costs. 7

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the EOQ formula: EOQ = Economic Order Quantity ACPO = Acquisition Costs Per Order AUU = Annual Usage in Units UC = Unit Cost CCP = Carrying Cost Percentage 8

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Example: If you know that it costs you $150 in overhead per order, you use 5,000 widgets a year, you pay $200 per widget, and your Finance Department tells you that annual carrying costs are equal to 20% of the value of the goods in stock, How much you should order? 194 widgets at a time. 9

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EOQ = Economic Order Quantity = ?? ACPO = Acquisition Costs Per Order = 5000 AUU = Annual Usage in Units = 150 UC = Unit Cost = 200 CCP = Carrying Cost Percentage = 20% 2*5000*150 = 1500000 200*20% = 40 1500000/40 = 37500 SQ.Roots = 193.6 = 194 10

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