Balancing Accuracy and Simplicity in Determining Reorder Points

Joseph A. Hunt
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Joseph A. Hunt: Ernst & Ernst, Cleveland, Ohio

Management Science, 1965, vol. 12, issue 4, B94-B103

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.

Date: 1965
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