Question

You are meeting with your company’s raw materials purchasing agents. As a group, you are discussing when raw materials orders should be placed based on production needs and supplier lead times. You have compiled the following production needs and lead time information: After you place an order for raw materials, the shipment usually arrives at your warehouse five days later. You determined that your production processes use about 300 units of raw materials per day. You want to keep your inventory carrying costs down and your supplier has a 100% on time-delivery rate. As a result, you decide to carry no inventory buffer. Based on the information presented and given your daily raw materials usage and the lead time for raw materials orders, what minimum units of raw materials inventory should your company maintain at all times?

Answer 1

this company's reorder point should be 1,500 units of raw materials.

Step-by-step explanation:

The reorder point is the minimum level that you can hold on inventory before purchasing more materials. It is calculated by multiplying a company's daily needs (300 units per day) x the delivery lead time (5 days) = 1,500 units.

If the company decided to keep a safety stock, then in order to determine the minimum inventory level you would need to add the desired safety stock + 1,500 units.