FIXED ORDER POINT MODEL-1 by JUMA1978

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									JOMO KENYATTA UNIVERSITY OF AGRICULTURE & TECHNOLOGY

ENTREPRENEURSHIP & PROCUREMENT DEVELOPMENT M. SC. PROCUREMENT & LOGISTICS STRATEGIC INVENTORY MANAGEMENT

FIXED ORDER INTERVAL MODEL (FOI-MODEL)

JUMA ANDREW MALALA

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FIXED ORDER INTERVAL (FOI) MODEL 1.0 Introduction The essence of proper inventory management is one of the key ways through which any firm can realize her profits. There are many strategic inventory management models: basing on issues of quantity, time (period-interval), cost and demand (orders) Fixed Order Interval model is used to determine the strategic inventory management FIT for a firm‟s optimal inventory management style. According to www.mcu.edu.tw (accessed on July 14, 2009), “The Fixed-Order-Interval (FOI) model is used when orders must be placed at fixed intervals………………” This implies that these orders are made:     Weekly Twice a month Yearly Daily

This model is used to control inventory for Independent Demand Items. The movement of many inventory items is cyclical in nature. They come into stocks and are issued, then reordered on a continuous cycle. We use particularly the saw-tooth diagram to show the ideal inventory movement and the calculation of the reorder for simplicity.

HOW THE REORDER POINT WORKS In this model there is a maximum stock level or ceiling which it would not be considered prudent to hold stock. Stock is gradually issued to production or any other department as (as the case may be), and the stock level is reduced, until it reaches the re-order level or reorder point. This is the amount of stock that would normally be used during the lead

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time. At this point a new order is issued for replenishment/replacement of stock. In theory, this should arrive just as the stock level falls to the minimum stock level, which is in fact the buffer stock-which is not realistic and too ideal to consider due to a number of technicalities from a member or two in the supply chain. Ironically of course, if it worked this smoothly there would be no need for buffer stocks!

Many scholars argue that safety or buffer stocks are not actual physical stocks which are never used but are simply a percentage of stocks over and above normal operating requirements. All stocks are related on a first in first out-FIFO-basis depending on the nature of the products in the inventory

Illustration Below is an adoption from the CIPS (charted institute of purchasing and supplies) study manual-level five storage and distribution illustrating the cyclic nature of FOI model as an inventory management system (www.cips.org downloaded from their website on June 18, 2009)

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Lead time As waiting to receive Fresh stocks Receiving of stock Issuance of Stock to various users in the supply chain Stock ordering

Stock at hand reaches reorder level

Figure I: FOI Model adopted from www.cips.org

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Figure II: Continuous nature of FOI adopted from www.pearsonedu.com

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2.0 Areas of application Ideally, FOI model is made use of (mainly) in retail businesses like     Groceries Supermarkets Vendoring (like newspapers-periodicals) Drugstores

It is equally essential in manufacturing firms-especially in ordering certain raw materialsand issuance of finished products to customers and/or warehouses at or to:   Plant: - during the processing and even the Work In Process (WIP) cases Storage facility: - this may range from go downs to departmental storage stores  Distributors: - these are main members of the supply chain and play a pivotal role in inventory management  Customers (at times) : - who could be the internal ones or the actual final users of the product/consumers-external 2.1 Reasons for Using FOI According to Malcolm Saunders in his book „Strategic Purchasing & supply Chain Management‟, “…………..stock-out may collapse a firm………….” Various factors may necessitate a firm to utilize this inventory management model, these reason include (but not limited to):   A supplier‟s policy may encourage orders at fixed intervals Grouping orders for items from the same supplier can produce savings in shipping/logistics costs

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Some situations require continuous monitoring of inventory levels, only periodic check is needed

2.2 Assumption of the FOI Even though we want to encourage the use of FOI-it is essential for us to be ware that it does have some „questionable‟ that have to be borne in mind. The FOI assumes that the demand during the interval is normally distributed-normality in the sense that it follows some accurately predictable pattern and follows all normality assumption laws of probability and/or statistical expectations for the said stock/inventory (data). However, this is not usually the case since there may be variations in  Demand: - there might be an upsurge or equally a fall in demand. This will make FOI inaccurate to base the inventory control on  Lead time: - the demand “swing” leads to a shift in all the operational areas including the LT (lead time)  Both lead time and demand: - Demand and LT affect all the other element in the inventory system either independently or dependently  One product at a time: - it (FOI) will be more accurate while handling a single product at a time. The irony is that organizations tend to handle directly or indirectly many items at any time either voluntarily or instinctively  Perfect distribution channels: - it demands that all distribution channels are working at their “best”, this implies that there are ZERO delay because

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this might lead to stock-outs especially in cases where the buffer stock may not sustain upsurge in demand (adopted from www.mcu.edu.tw)

3.0 Computation(s) of FOI Average total stock = Average working stock = Reorder point or Level (ROL) = Half the total stock Half of (total stock minus buffer stock) the quantity of tock required to cover the lead time for new orders without going

below the minimum stock level Re-Order Quantity (ROQ) = the order quantity required to take the stock level from minimum. This is the quantity ordered. Amount to order = expected demand during interval + safety stock - amount on hand This is [amount to order equals expected demand during interval plus safety stock minus amount of stock on hand] Amount to order = ₫ (OI + LT) + z∂ √ (OI + LT) – A (adopted from www.mcu.edu.tw ) Where OI = order interval (length of time between orders) A = amount on hand at reorder time Examples of Stock Management Assume the following: Lead time for component x is 1 week Weekly usage =250 units Buffer stock represents 1 week‟s usage

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Calculate the following: ROL (Reorder Level) = 500 (1 week‟s usage + buffer stock) ROQ (Reorder Quantity) = 1000 (4 weeks usage) Buffer stock = 250 Maximum Stock = 1250 (4 weeks usage + buffer stock) Average stock = 625(1250/2) Average working stock = 500 (1250-250)/2

3.1 Challenges of the FOI model There are situations where there might be the risk of stock-outs within the re-ordering cycle. This normally occurs at two crucial times, these are   Just before placing the order-as one waits to receive order (current) While waiting to receive the next order

3.2 Advantages of FOI The www.mcu.edu.tw (accessed online on July 2, 2009) “…….. FOI can be well managed and add value to an organization……..” Some of these value adds are:  FOI results in a tight control needed for A items in an A-B-C classification due to its periodic reviews  When two or more items come from the same supplier, group orders can yield savings in ordering, packing and carrying costs  It is the (only) practical model approach to inventory if withdrawals cannot be closely monitored

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Enhanced responsiveness to demand fluctuations Replenishments orders are automatically generated at the appropriate time by comparison of actual stock levels against re-order levels

3.4 Disadvantages of FOI According to T. Lysons (2005) there are many un-doings to FOI, these are:  High carrying costs due to necessicity of a larger amount of safety stock for a given risk of stock-out because of the need to protect against shortage during an entire order interval plus lead time (instead of lead time only)  Increased costs of periodic reviews in terms of personnel, materials and time of doing the reviews  The re-ordering system may become overloaded if many items inventory reach re-order level simultaneously  Random reordering pattern due to items coming up for replenishment at different times

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4.0 Conclusion With all assumptions made in a particular inventory system, FOI is a simple, straight forward inventory control system that can be easily assimilated and utilized in the nature of organizations highlighted earlier herein especially small business enterprises-and mostly dealing with single item that stock levels are easier to monitor/manage such as Small scale enterprises like kiosks,     Drug stores Restaurants School stationary issuance store section Single commodity manufacturing companies

The key reasons that will encourage a firm to utilize FOI are    FOI is user friendly It can help make profit from maintaining low stock levels It can enhance effectiveness in preparedness to demand swings

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REFERENCES

1) Malcolm S., Strategic Purchasing & Supply Chain Performance, second edition (1998), Prentice Hall-London 2) www.mcu.edu.tw (accessed online on July 2, 2009 at 1545H) 3) www.pearsoneduc.com (accessed online on June 29, 2009 at 1730H) 4) T. Lysons, Supply Chain management, 5th Edition (2005) 5) www.cips.org (accessed online on June 18, 2009)

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