- Lead Time: Lead time is the time normally take by the supplier in sending goods after placing the order.
- Average Usage: Average usage means average consumption in a particular time period.
- EOQ (Economic Order Quantity): EOQ is the level of inventory order that minimizes the total cost associated with inventory management.
- Safety Stock: Safety stock is the minimum level of stock that is to be maintained to avoid delay.
Re-order level= Maximum usage X Maximum lead time
= Minimum stock level + (Average or Normal usage X Average lead time)
Minimum stock level = Re-order level – (Average usage X Average lead time)
Maximum stock level = Re-order level + Re-ordering quantity – (Minimum usage X Minimum lead time)
Danger level = Average usage X Maximum re-order period for emergency purchases
Average stock level
= Minimum stock level + ½ of Re-order quantity
= ½ (Minimum stock level + Maximum stock level)