Ordering point and ordering interval process: a direct comparison
What are the advantages and disadvantages of the ordering point and ordering interval system? Which conditions support the use of the ordering interval system and which support the ordering point process? The following table provides insights:
|Ordering point system
|Ordering interval system
A detailed look at the ordering point method
The ordering point method is distinguished from the order interval system by key characteristics. Variants of the application exist as well. Roughly, the key characteristics can be described as follows:
The ordering point method is largely volume driven. Specifically, this means: An order is issued as soon as a certain previously defined inventory level is reached - the so-called reporting inventory. The order dates are therefore variable and are not set in advance. The ordering point method is contingent on the verification of the current inventory after each removal from the warehouse.
The reporting level is usually determined by a previously defined safety level and the typical consumption volumes until the arrival of new goods. Principally, the fast delivery is made, the lower the reporting level may be. For goods for which inventory should always be available, the safety level is computed in addition to the typical consumption volumes until the next delivery arrives. It is a large iron reserve.
The purpose of the safety level is to compensate, as much as possible, for uncertainties and delivery gaps. Ideally, delayed deliveries, discrepancies between book and warehouse inventory and incorrect needs projections can be bridged by the safety inventory.
On the one hand, it is possible to respond to the attainment of the reporting level by issuing an order for a defined volume ("ordering point lot size policy"). On the other hand it may make sense to replenish the inventory after each removal from the warehouse to a defined target level ("ordering point inventory level policy").
Computing ordering points - an example
An automaker needs 1000 steering wheels a day for the production of its cars. The manufacturer does not make them in house but procures them from a supplier. The straight forward transportation time takes four days (replenishment time). Once they have arrived, the purchaser subjects them to a one-day inbound goods check. Hence, it takes five days for the steering wheels to get from supplier to production. To retain a secure minimum inventory, the automaker uses a buffer of three days in its calculation.
The result is a minimum inventory level of 3000 steering wheels (3 x 1000 = 3000).
The ordering point (reporting inventory) in this constellation would be 8000 steering wheels. On the one hand it is composed of a minimum inventory of 3000 each and on the other hand the daily consumption volume (1000 each) multiplied by five days of ongoing replenishment times.
3000 (minimum inventory) + 1000 daily consumption volume x 5 days replenishment time) = 8000
If the production volume of steering wheels drops below 8,000 the ordering point has been reached and new material will have to be ordered.
The ordering interval process in detail
In many ways, the ordering interval process is similar to the ordering point process, but there are some key differences.
Due date orientation:
Unlike the ordering point process, the ordering interval method is not primarily volume based but due date oriented. This means that the ordering of new goods happens periodically at certain time intervals. The respective concrete ordering time is thus not contingent upon the current inventory.
A generous safety level is indispensable in conjunction with the order interval method to be able to accommodate unexpected increases in demand.
Principally, the order interval method offers two ordering policy options. Both, the order intervals and the order volumes are fixed. This variant makes sense if the consumption is historically consistent. This is also called the "order interval batch size method." While the order period is consistent, the order volume is individually adjusted. Especially if a manufacturer delivers multiple products, this method is recommended to optimise coordination. The method is also called "Order interval warehouse level method."
Determining the order intervals - an example
If under "compute ordering point" (see above) the automaker would work in compliance with the order interval principle, it could potentially work as follows under the same conditions: for production, the manufacturer needs 1000 steering wheels every day. To safeguard production, the manufacturer automatically orders a quantity equivalent to the number of workdays in a month at the beginning of every month. Lump sum, this totals 20,000 each (order interval).
However, given that not every work week has five working days and other variables may arise, the order quantity should be changed in certain intervals to prevent having too many or too few steering wheels. This may translate into missing quantity costs. To prevent this, it is expedient to check the inventory numbers regularly. It is possible to determine the development of consumption and the order volume that has to be adjusted by the fixed procurement date.
Conclusion: The individual conditions of the company drive these decisions
Ordering point and ordering interval method have their specific advantages and disadvantages. The ordering system to be used hinges primarily on the demand conditions and purchasing conditions of the sold goods. It does not always make sense to focus on only one of the two ordering methods. In practice, they are frequently used together.