buffer inventory, re-order level and lead time
4.2 Inventory Management – Managing Inventory
Buffer Inventory (Safety Stock) 📦
Think of buffer inventory as a spare tire you keep in your car. If you get a flat, you can keep driving without a breakdown. In business, it protects you against unexpected demand spikes or supply delays.
Formula (simple version):
$Buffer = Safety\ Stock + \text{Extra for demand variability}$
Example:
Average daily demand = 100 units
Demand variation (σ) = 20 units
Lead time (LT) = 5 days
Safety stock (Z = 1.65 for 95% confidence):
$SS = 1.65 \times 20 \times \sqrt{5} \approx 73$ units
Buffer = 73 units (you keep this on hand as a safety net)
Exam tip: Always remember to include safety stock when calculating the reorder point. Show the safety stock calculation separately.
Re-order Level (Reorder Point) 🔁
The reorder point is the inventory level at which you should place a new order to avoid stock‑outs.
Formula:
$ROP = (Average\ Demand \times Lead\ Time) + Safety\ Stock$
Example (using the numbers above):
$ROP = (100 \times 5) + 73 = 573$ units
If inventory falls to 573 units, you should place an order.
Exam tip: Show the step‑by‑step calculation. Write the formula, plug in the values, and state the final reorder point clearly.
Lead Time ⏱️
Lead time is the time between placing an order and receiving it. It can include:
- Order processing time
- Production time (if you manufacture)
- Transportation time
Why it matters:
The longer the lead time, the higher the reorder point and the larger the buffer you need.
Exam tip: Clarify whether the lead time is order lead time or production lead time in the question. This can change the calculation.
Quick Reference Table
| Concept | Formula | Example Value |
|---|---|---|
| Buffer Inventory (Safety Stock) | $SS = Z \times \sigma_d \times \sqrt{LT}$ | $SS = 1.65 \times 20 \times \sqrt{5} \approx 73$ units |
| Reorder Point | $ROP = (D \times LT) + SS$ | $ROP = (100 \times 5) + 73 = 573$ units |
| Lead Time | Time from order to receipt (days) | 5 days |
Exam Tips & Tricks 🎯
- Ask: “What is the safety stock?” and “What is the lead time?” before calculating.
- Show every step: write the formula, plug in numbers, and state the final answer.
- Use emojis to remember key concepts: 📦 = Buffer, ⏱️ = Lead Time, 🔁 = Reorder Point.
- Check units – days for lead time, units for inventory.
- When a question says “minimum stock level,” it usually means the reorder point.
Revision
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