Balancing Accuracy and Simplicity in Determining Reorder Points

Abstract

Many methods have been developed to determine the proper reorder points and order quantities in an inventory system. These methods are based on a wide range of inventory models—from elementary deterministic models to sophisticated probabilistic models with time-varying parameters. This paper deals with two topics related to these calculations which were encountered during the design of an inventory control system for a firm in the heavy goods industry. A mathematical model is developed to describe the average annual variable cost of maintaining the inventory. Based on this model, the paper evaluates the savings obtained by using a simultaneous solution for reorder point and order quantity rather than a simpler separate solution. Then, this model is extended to describe the effect of batch withdrawals as a renewal process. The paper presents an adjustment which can be applied to the original reorder points based on unit withdrawals. Both of these topics are described in the context of a practical application.