Order Point System / Fixed Order System

Order point system / Fixed Order quantity system of inventory control is based on the (Re) Order point and Order quantity factors rather than on the time factor. The inventory policy, in this system, is drawn, defining the following:

Fixed Order point / Re-Order Level (ROL) for each item Fixed Maximum , Minimum levels for each item Fixed Quantity to be ordered    

Often called Min-Max systems, these involve both a maximum inventory level and a minimum at which reorders are generated. Basically, units of an item are issued until the level of that inventory reaches the predefined reorder point. An order is then triggered for a predetermined quantity (usually a calculated economic order quantity). In this system, the order quantity is constant and the time between orders s variable.

The different Inventory points (Levels) of stock for an item are:

Maximum level (Max.) , predetermined Minimum Level (Safety stock, SS), predetermined Lead time (LT) , predetermined

Monthly demand = D (often based on Moving average method)

MaxL.= (Review period + LT + SS) X D

Reorder level (ROL) = (LT + SS) X D

Order Quantity (OQ) = Max. – (Present stock + Pipeline dues)

Process : In course of consumption of an Inventory item , say, in the form of issue from Stores to the users, the stock level of the item starts depleting through its usage rate D.

As per the above definition , the stock goes up to the maximum level in the first replenishment and then, because of steady consumption, comes gradually down. In that process ,again as per the definition , it touches the ROL.As soon as the stock level touches the ROL fresh replenishment action is initiated.

It is presumed that the next lot shall arrive by the time the present depleting stock touches the Safety stock , keeping a stable Lead time and a stable usage rate D.  

In some places the Order quantity is decided by the above formula whereas in some other places it is determined by the Economic Order Quantity (EOQ) concept. That's whenever an order is to be placed the quantity shall be EOQ.

Advantages :

Each item is procured in the most economical quantity

An item is attended to only when it needs attention i.e. when its stock has reached the ROL

Control can be exercised on Inventory w.r.t. Max & Min levels

Applicability of Order Point system :

Item must have a reasonable stable usageLead time should not have radical variationSupplier should be able to accept irregularly timed and unscheduled orders

Limitations of the system :

Needs continuous monitoring of stock level of each itemCumbersome to operate for items with unstable usage and lead timePerpetual inventory records are required

It is presumed that the next lot shall arrive by the time the present depleting stock touches the Safety stock , keeping a stable Lead time and a stable usage rate D.  

In some places the Order quantity is decided by the above formula whereas in some other places it is determined by the Economic Order Quantity (EOQ) concept. That's whenever an order is to be placed the quantity shall be EOQ.