Explain Re-Order Quantity (ROQ).
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The Reorder Quantity (ROQ), also known as the Economic Order Quantity (EOQ), is a key inventory management parameter that determines the quantity of inventory to be ordered when the inventory level reaches the reorder point. It represents the optimal order quantity that minimizes total inventory costs while ensuring that enough inventory is available to meet demand until the next reorder.
The Reorder Quantity is calculated based on the following factors:
Demand Rate: The demand rate, also known as the usage rate or consumption rate, represents the rate at which inventory is consumed or sold during a specific time period. It is typically measured in units per time period (e.g., units per day, week, or month) and is derived from historical sales data, demand forecasts, or average usage rates.
Lead Time: The lead time is the duration between placing a replenishment order and receiving the ordered inventory. It includes the time taken for order processing, shipping, and delivery. Lead time variability may also be considered in the calculation of the Reorder Quantity to account for uncertainties in delivery times.
Holding Costs: Holding costs, also known as carrying costs, are the expenses incurred for holding and storing inventory. These costs include warehouse rent, utilities, insurance, and inventory management labor. Holding costs increase with higher inventory levels and represent the cost of tying up capital in inventory.
Ordering Costs: Ordering costs are the expenses associated with placing orders for inventory, including order processing costs, transportation costs, and supplier communication costs. Ordering costs vary based on order frequency, order size, and procurement practices.
The Reorder Quantity is calculated using the following formula:
Reorder Quantity (ROQ) = √((2 Demand Rate Ordering Cost) / Holding Cost)
The EOQ formula seeks to minimize the total costs associated with inventory management, including holding costs and ordering costs. By determining the optimal order quantity, businesses can strike a balance between holding excess inventory (which increases holding costs) and placing frequent orders (which increases ordering costs), thereby optimizing inventory levels and minimizing total inventory costs.