Reorder quantity
During item location setup, you enter reorder information for inventory items at a specific location. Two options you decide are the reorder policy and the quantity to be reordered, and how that quantity is to be determined. The reorder policy tells the application when reordering occurs, and the reorder quantity code tells the application how to determine the reorder quantity. The reorder quantity codes are explained in the following table.
| Reorder quantity code | Description |
|---|---|
| Fixed reorder quantity | Orders the fixed quantity that you enter. |
| Difference quantity | Orders the difference between a reorder point that you enter and the available quantity. |
| Maximum | Orders the difference between the available quantity and a maximum order quantity that you enter. |
| Economic order quantity | Orders the quantity that the Economic order quantity (EOQ) calculation determined. |
Fixed reorder quantity code
An example of fixed reorder quantity code is an office using toner for the copier machine. You can define a fixed quantity code of three toner cartridges. Every time the stock-on-hand reaches a reorder point of one, a requisitions is created to order three more cartridges.
Difference quantity code
With the difference quantity code, an example could be that the same office maintains a certain level of copier paper. Every time the office falls below a reorder point of six boxes of paper, a requisition is created to maintain stock-on-hand of six. For example, if the supply reaches four boxes, then two boxes are ordered to reach six. The next week, supply drops down to three boxes and three more are ordered to reach full inventory.
Maximum code
An example of the maximum code is an inventory manager at a large machine manufacturer replenishing steel and controlling the quantity of steel purchased at any given time. The manager defines a reorder point and a maximum order point. If the reorder point is 20 and the maximum order is 100, when the stock-on-hand falls to 12 a reorder document is created to purchase 88, then the difference between the stock-on-hand and the maximum order.
Economic Order Quantity (EOQ) code
One example of the Economic Order Quantity code is refrigerators at a large appliance wholesaler that are expensive to stock, but relatively inexpensive to order. The Economic Order Quantity calculation provides the application with an optimal stock-on-hand quantity for refrigerators. The quantity suggested is low because the formula considers that it is less expensive to frequently order small quantities of refrigerators than to stock large quantities.
With a reorder quantity code of E (Economic Order Quantity), the method of reordering items is most cost effective. The Economic Order Quantity code uses a calculation to balance the cost of ordering against the cost of stocking an inventory item. To use the Economic Order Quantity code, you must choose automatic purchasing for the item location. The code is available with either of the reorder policies, Fixed Order Point or Time-Phased Order Point.
The Economic Order Quantity is the quantity needed on a purchase order when the stock-on-hand for an item falls below the reorder point set at the item location. You can enter the Economic Order Quantity manually or run a batch program to perform the calculation, Economic Order Quantity and Reorder Calculation (IC120). The Economic Order Quantity calculation uses the following formula:
EOQ = square root of [(2 times the annual demand quantity times the fixed order preparation cost) divided by (the carrying item unit cost)"
The calculation provided by the EOQ formula only replaces the reorder point for an item if you define EOQ as the reorder quantity code and update the reorder point when you run Economic Order Quantity and Reorder Calculation (IC120).
Some considerations to note about the formula:
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The annual demand quantity is the item quantity that you expect to have in the warehouse over a year's time. In other words, the quantity that comes into the warehouse while the item continues to be consumed from its location. The quantity can come from past demand, from past demand with this year's expected demand, or from firm orders. Be aware that the annual demand quantity and the carrying item unit cost need to be in the same unit of measure.
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The fixed order preparation cost is the cost that does not change with an order's size. For example, such costs could include order research and administration, forms for picking and shipping, and prorated maintenance fees for software and hardware. The possible sources for these fixed costs are labor figures (from Lawson Human Resources) and general ledger accounts. Variable costs, such as the cost of picking, packing, and shipping, should not be included.
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The carrying item unit cost represents the cost of doing business: paying for rent and insurance, utilities, spoilage, and so on. Together, these costs are what's needed to be able to stock the items at the warehouse.