Microsoft® Excel Data Analysis and Business Modeling

Chapter 66. Determining the Reorder Point: How Low Should I Let My Inventory Level Go Before I Reorder?

• At what inventory level (called the reorder point) should I place an order if my goal is to minimize the sum of annual holding, ordering, and shortage costs?

• What does the term 95 percent service level mean?

In Chapter 65, we used the economic order quantity (EOQ) to determine an optimal order quantity and production batch size. We assumed that demand occurred at a constant rate. Thus, if annual demand occurred at a rate of, say, 1200 units per year, during each month demand would equal 100 units. As long as demand occurs at a relatively constant rate, the EOQ is a good approximation of the cost-minimizing order quantity.

In reality, demand ...