Business – 4.2 Inventory management – Managing inventory | e-Consult
4.2 Inventory management – Managing inventory (1 questions)
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The reorder point (ROP) line marks the inventory level at which a new order should be placed to avoid stock‑outs. It is calculated as:
- Average demand during lead time, plus
- A safety stock buffer that accounts for demand variability and lead‑time uncertainty.
When the actual inventory level touches or falls below the ROP line, the firm initiates a replenishment order. By incorporating lead time, the ROP ensures that the order arrives before the existing stock is exhausted. The safety stock component mitigates the risk of unexpected spikes in demand or longer-than‑expected lead times, keeping the inventory system stable.