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Harshdeep is the stock keeper of Neha Textiles Ltd. The company is into converting cotton yarn into fabric and then further computerised printing on the same to add value to the fabric. He wants to know the ideal quantity of yarn to be ordered so that the production process does not stop. How can he know the correct time to place an order?
  • a)
    By calculating Break-even point
  • b)
    By calculating Re-order point
  • c)
    By calculating Economic order quantity
  • d)
    By calculating Lead time    
Correct answer is option 'B'. Can you explain this answer?
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Harshdeep is the stock keeper of Neha Textiles Ltd. The company is int...
The basic formula for the reorder point is to multiply the average daily usage rate for an inventory item by the lead time in days to replenish it. This formula alteration means that replenishment stock will be ordered sooner, which greatly reduces the risk that there will be a stockout condition.
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Harshdeep is the stock keeper of Neha Textiles Ltd. The company is int...
Re-order point

The correct answer is option 'B', which suggests that Harshdeep should calculate the re-order point to determine the ideal quantity of yarn to be ordered. The re-order point is the inventory level at which a new order should be placed to replenish stock before it runs out.

Importance of re-order point

Determining the re-order point is crucial for businesses to ensure that the production process does not stop due to a shortage of inventory. Ordering the yarn at the right time will help maintain a consistent flow of production and prevent any disruptions.

Calculation of re-order point

The re-order point can be calculated using the following formula:

Re-order Point = Lead Time Demand + Safety Stock

- Lead Time Demand: This refers to the average demand for yarn during the lead time, which is the time between placing an order and receiving the delivery. Harshdeep can calculate the lead time demand by multiplying the average daily demand for yarn by the lead time in days.

- Safety Stock: This is an additional quantity of yarn kept as a buffer to account for any unexpected delays or fluctuations in demand. Harshdeep can determine the safety stock based on factors such as historical demand variability, supplier reliability, and production lead time.

Example:

Let's assume that Neha Textiles Ltd has an average daily demand for yarn of 100 units, a lead time of 5 days, and a safety stock of 50 units.

Lead Time Demand = Average Daily Demand * Lead Time = 100 units/day * 5 days = 500 units
Re-order Point = Lead Time Demand + Safety Stock = 500 units + 50 units = 550 units

Therefore, Harshdeep should place an order for yarn when the inventory level reaches 550 units to ensure a continuous production process without any interruptions.

Conclusion

Calculating the re-order point is essential for stockkeepers like Harshdeep to determine the ideal quantity of yarn to be ordered. By considering factors such as lead time demand and safety stock, businesses can ensure a steady flow of inventory and prevent production disruptions.
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Harshdeep is the stock keeper of Neha Textiles Ltd. The company is into converting cotton yarn into fabric and then further computerised printing on the same to add value to the fabric. He wants to know the ideal quantity of yarn to be ordered so that the production process does not stop. How can he know the correct time to place an order?a)By calculating Break-even pointb)By calculating Re-order pointc)By calculating Economic order quantityd)By calculating Lead time Correct answer is option 'B'. Can you explain this answer?
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