Reorder Point Calculation in 7 minutes: ROP
Hello and welcome back again to MBAbullshit.com.
So, our topic for this video is Re-Order Point or the basic Re-Order Point Model.
Remember you can always go back to MBAbullshit.com.
Alright so this video talk about the basic Re-order point model and after this you can
move on to my next video on MBAbullshit.com about Re-order point with safety stock.
Also, check out my free related video on the Economic Order Quantity Model on MBAbullshit.com.
Alright, so let's start with a story.
Let's say your friend Mike wants to buy basketballs from a factory and sell them to his neighborhood.
He estimates he'll sell about 1,200 basketballs per year.
So that is the yearly demand.
At first, Mike thought of just buying a fixed 100 basketballs at the beginning of every
month from the factory, which will equal his 1,200 basketballs by the end of the year.
The problem is Mike worries that he doesn't know when he might run out of basketballs.
If that happens, he'll have to wait until the next month to get a new batch of basketballs.
He might end up with no basketballs to sell until the next month when a new delivery arrives.
He'll have to send customers away.
His friend Lily suggests.
"You should order a new batch of basketballs even when you have only 50 basketballs remaining.
Just to be sure that you never run out."
His other friend and fishing partner Janet says.
"Lily that's too much!
Mike should order a new batch of basketball when he has only 1 or 2 basketballs left.
That should be good enough."
So, who should Mike listen to?
Lily or Janet?
Well by the way, Lily is adorable and cute but Janet is hot and sexy.
So, that makes the decision making a lot more difficult from Mike because he has to choose
between cute babe and a sexy babe.
Alright, so in MBA bullshit language, Lily is suggesting a "Re-order Point" of 50 basketballs,
while Janet is suggesting a "Re-order Point" of 1 or 2 basketballs.
So, let's say that every time Mike orders a new batch of basketballs, it takes 4 working
days for the new batch to be delivered.
We call that "Lead Time".
Okay?
And let's assume further that there are 250 working days each year.
And remember from earlier in the story I already said that the demand is about 1,200 basketballs
a year.
So, again who should Mike listen to?
Lily or Janet?
For this, we use the Re-order Point Formula which looks like this which is very simple:
ROP = Demand per year x Lead Time # Working days per year
Re-Order Point equals the demand per year divided by the working days per year multiplied
by the lead time.
So, all these figures are given.
So we now know that the Re-Order Point is based on these variables, Demand 1,200 per
year divided by the working days per year 250 which we get from this, multiplied by
the lead time.
And the lead time is 4 working days.
Remember multiplied by the lead time.
And simplify this same thing; we get the re-order point of 4.8 x 4 or 19.2.
So, Mike should immediately place a new order as soon as he has only 19.2 basketballs remaining.
So, he has to say sorry to both Lily and Janet because they are both wrong.
To be safe, we should round this off to the higher whole number and that depends on your
professor.
But personally I’d like to round it off to the higher whole number of 20.
So Mike should immediately place a new order as soon as he has only 20 basketballs remaining.
Our Re-Order Point is 20.
And the reason why do this is because obviously you cannot purchase 0.2 of a basketball.
Alright so that’s as simple as it is the Re-Order Point.
Remember to share if you like it.
On Twitter, we’re simply known as @MBAbullshit, Facebook.com/MBAbullshit or simply please
forward my YouTube link on your email or post it on your Facebook or any other social media
that you prefer.
Alright, so have a great day and good bye!
debbierojonan Page 1