The document discusses inventory models, specifically the fixed reorder quantity system and the fixed reorder period system, which help businesses optimize inventory levels and manage ordering processes. It explains key concepts such as reorder level, safety stock, and order quantity, along with formulas for calculating these metrics. Examples illustrate how to determine order quantities and manage inventory effectively based on demand and lead times.

1. Inventory Models
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2. INVENTORY MODEL
 Inventory model is a mathematical model that helps business
in determining the optimum level of inventories that should
be maintained in a production process, managing frequency
of ordering, deciding on quantity of goods or raw materials to
be stored, tracking flow of supply of raw materials and goods
to provide uninterrupted service to customers without any
delay in delivery.
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3. There are two types of Inventory model widely used in
business.
 Fixed Reorder Quantity System
 Fixed Reorder Period System.
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4. Fixed Recorder Quantity System
 Fixed Reorder Quantity System is an Inventory Model,
where an alarm is raised immediately when the
inventory level drops below a fixed quantity and new
orders are raised to replenish the inventory to an
optimum level based on the demand.
 The point at which the inventory is ordered for
replenishment is termed as Reorder Point.
 The inventory quantity at Reorder Point is termed
as Reorder Level and the quantity of new inventory
ordered is referred as Order Quantity.
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5.  Average Demand (DAv): It is the average number of
order requests made per day.
 Average Lead Time (TL): The time required to
manufacture goods or product.
 Average Lead Time Demand (DL): Average number of
orders requested during the Lead Time.
Average Lead Time Demand (DL)
= Average Demand (DAv) x Average Lead Time (TL)
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6. Safety Stock (S): It is the extra stock that is always maintained
to mitigate any future risks arising due to stock-outs because of
shortfall of raw materials or supply, breakdown in machine or
plant, accidents, natural calamity or disaster, labour strike or
any other crisis that may stall the production process.
The quantity of safety stock is often derived by analysing
historical data and is set to an optimized level by evaluating
carefully the current cost of inventory and losses that may be
incurred due to future risk.
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7. Reorder Level
Reorder level is the inventory level, at which an alarm is triggered
immediately to replenish that particular inventory stock. Reorder
level is defined, keeping into consideration the Safety Stock to
avoid any stock-out and Average Lead Time Demand because
even after raising the alarm, it would take one complete process
cycle (Lead Time) till the new inventories arrive to replenish the
existing inventory.
Reorder Level (RL)
= Safety Stock (S) + Average Lead Time Demand (DL)
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8. Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O)
 Order Quantity (O): Order quantity is the Demand (Order requests)
that needs to be delivered to the customer.
 Minimum Level: At least Safety Stock has to be always maintained
to avoid any future stock- outs as per the standard practices of
inventory management.
Minimum Level (LMin) = Safety Stock (S)
 Maximum Level: The maximum level that can be kept in stock is
safety stock and the demand (the quantity ordered).
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10. Example: The order quantity of an Item is 600 Units. The
safety Stock is 200 Units. The Average Lead Time is 5 Days
and average consumption per days is 40 units.
Order Quantity (O) = 600 Units
Safety Stock (S) = 200 Units
Average Lead Time (TL) = 5 Days
Average Demand ( DAv ) = 40 Units
Average Lead Time Demand (DL) = Demand (DAv) X Lead Time (TL)
= 40 x 5 = 200 Units
Reorder Level (RL) = Safety Stock (S) + Average Lead Time Demand (DL)
= 200 + 200 = 400 Units
Minimum Level (LMin) = Safety Stock (S) = 200 Units
Maximum Level (LMax) = Safety Stock (S) + Order Quantity (O)
= 200 + 600 = 800 Units
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11. Fixed Order Period System
 Fixed Reorder Period System is an Inventory Model of
managing inventories, where an alarm is raised after
every fixed period of time and orders are raised to
replenish the inventory to an optimum level based on the
demand.
 In this case replenishment of inventory is a continuous
process done after every fixed interval of time.
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12.  Regular Intervals (R): Regular Interval is the fixed time
interval at the end of which the inventories would be
reviewed and orders would be raised to replenish the
inventory
 Inventory on Hand (It): Inventory on hand is the Inventory
level measured at any given point of time.
 Maximum Level (M): It is the maximum level of inventory
allowed as per the production guidelines. The maximum
level is derived by analysing historical data.
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13.  Order Quantity: In this system, inventory is reviewed at
regular intervals (R), inventory on hand (It) is noted at the
time of review and order quantity is placed for a quantity
of (M) – (It).
Order Quantity (O) = (M) – (It)
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15. Example: Inventory is replenished at every regular interval of 5
days. The maximum allowable inventory is 800 Units. The
inventory reviewed on Day-5, Day-10, Day -15 and Day -20 were
387 Units, 201 Units, 498 Units and 127 Units respectively.
 Regular Intervals (R) = 5 Days
 Maximum Level (M) = 800 Units
 Inventory on Hand: I5 = 387 Units, I10 = 201 Units, I15 = 498
Units and I20 = 127 Units
 Order Quantity (O) = (M) – (It).
 Order Quantity (O5) = 800 – 387 = 413 Units
 Order Quantity (O10) = 800 – 201 = 599 Units
 Order Quantity (O15) = 800 – 498 = 302 Units
 Order Quantity (O20) = 800 – 127 = 673 Units
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