Fixed Time Order
Inventory Systems
Slide presentation by Steven Cheney
Final project for Operations Management 345
Boise State University
Instructor: Dr.Tom Foster
6/29/2016
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Inventory Control
Systems
1. Fixed quantity re-order inventory system.
Re-order quantities are predetermined, and the reorder takes place when predetermined low levels of
inventory are reached.
• The re-order date varies.
2. Fixed time re-order inventory system.
The re-order date is predetermined and an order is
placed once a consistent passage of time occurs.
Orders are given and received consistently.
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• The re-order quantity varies
2
Fixed Time Re-order System
Ideal for use in:
Smaller businesses with single or a low
number of vendors and or lower volume
sales.
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Small to medium retail.
Restaurants.
Job shop manufacturing.
Light industry.
Construction.
Service firm.
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Advantages of Fixed Time
Re-order System
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
Ideal fixed re-order and distribution dates can be negotiated
with vendor and distributor to ensure desired management
of inventory.

Inventory levels can be minimized during low demand
periods easily.
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Communication between a small number of vendors or
with a wholesaler is consistent and reliable.

Wholesale distributors may have salespersons who place
orders for the retailers, eliminating inventory costs.
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Different Applications
Business start ups.
Can negotiate and determine ideal re-order intervals.
Low volume retail and job shop.
Low number of vendors, custom quantity ordering,
with strict scrutiny.
Larger volume retail and job shops.
Utilizing of ABC method of prioritizing inventory
management and minimizing inventory expenses.
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Determine Order Interval
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In a business start up, Vendor and
wholesale distributors may negotiate with
a small firm in regards to ordering and
distribution dates.
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Changing or establishing ideal order
intervals may be a great way to improve
quality in an existing firm.
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Order Interval Determination
For Multiple Items

The economic order interval can be obtained by minimizing the total annual
cost. Neglecting stock out cost, the formulation is:
Total annual cost = (purchase cost) + (order cost) + (holding cost)
The minimum cost order is obtained by taking the first derivative of the
total annual cost with respect to the order interval (T) and setting it
equal to zero.
Ri = annual requirement for item i.
Pi = purchase cost of item i.
N = total number of joint order items.
C = order cost for the joint order
C = order cost associated with each individual item.
T = order interval in years.
F = annual holding cost as a fraction of purchase cost.
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Formula
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Difficulties in Order
Intervals

It is not common for a business start up to have access to
the information required to determine the optimal re-order
interval dates.
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Managerial experience and adequate market exposure is
the best way to determine re-order dates in start ups.
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Wholesalers and vendors should also be able to provide
valuable input when determining a re-order schedule.
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How It Works:
Fixed Time Re-order Inventory
Inventory levels are high
Merchandise is in stock
Demand for good
Is stock higher than demand?
No
Yes
Lost Sale
Has Fixed Time re-order period arrived?
Determin stock position
qty on hand + qty on order - back orders
Compute order quanity
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Place re-order
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Fixed Time Re-order
Lag time
Order
Quantity
Lag time
Declining
Inventory
levels
Declining
Inventory
Levels
L
L
T
L
Fixed Re-order
Time
L
T
Fixed Time to re-order
(such as every five days)
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Low Inventory Costs!
High Inventory Control!
?
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Quantity levels are quickly adjusted for fluctuating demand.
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Inventory management and ordering are monitored only on order days,
eliminating daily supervision of inventory.
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Seasonal demand and demand trends are difficult to forecast. Each
inventory items demand is analyzed on a routine basis by a department
manager.
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ABC Fixed Time Re-order
Intervals
Demand for a large variety of goods
with different values vary significantly.
– ABC classification system divides inventory
into three different groups.
1. Close inventory control (continuous).
2. Moderate inventory control (less stringent).
3. Low scrutiny inventory control (periodic review).
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ABC Classification
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The first step in ABC classification is to associate
each class with a different dollar valuation.
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The next step is to determine the inventory
scrutiny level to be assigned for each
classification.
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Why ABC classification?
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Typically the majority of a firms profit comes
from a small number of items in inventory, and
sometimes these items are sold in large volume.
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Moderately profitable items need less inventory
scrutiny
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Low profitable inventory requires little
management, minimizing inventory costs.
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Perfect Example
Russ’s Trusses
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Ruses trusses is a large truss producer/construction
company that purchases truss kits and the kits are custom
assembled to engineered specifications. They are used by
the firm in construction or sold to outside construction
companies.
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Ruses trusses utilizes an ABC classification inventory
management system. It is beneficial because one
employee supervises all inventory of materials.
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Russ’s Trusses
ABC Inventory System
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Russ Jr. Re-orders class A kits every day from vendor A
direct over the internet.
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He orders class B kits once a week from vendor B via fax
machine.
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Wholesaler C comes one a month to do the inventory of
C kits and re-orders. The salesperson tries to sell different
new items to Russ Sr.
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Russ’s Trusses
Annual Inventory Value and Consumption
Kit
Section 1
Section 2
Secton 3
Top Kit
Bottom Kit
Side Kit R
Side Kit S
Extendor R
Extendor S
Sundry Kit
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Unit Cost
$60.00
$350.00
$30.00
$80.00
$30.00
$20.00
$10.00
$320.00
$510.00
$20.00
$1,430.00
Consumption
90
40
130
60
100
180
170
50
60
120
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Contribution to Value

Compute each item’s percentage of total value and
quantity.
Q x P = Value for item
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Value for item / total value = % of total value
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Then rank the inventory in terms of % of total
value.
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ABC Inventory Classification
Russ’s Trusses
Kit
Section 1
Section 2
Secton 3
Top Kit
Bottom Kit
Side Kit R
Side Kit S
Extendor R
Extendor S
Sundry Kit
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Annual Cost
$
$
$
$
$
$
$
$
$
$
$
30,600.00
16,000.00
14,000.00
5,400.00
4,800.00
3,900.00
3,600.00
3,000.00
2,400.00
1,700.00
85,400.00
% Inv. Value
35.9
18.7
16.4
6.3
5.6
4.6
4.2
3.5
2.8
2
100%
% (Inv volume- Qty)
6
5
4
9
6
10
18
13
12
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100%
Classification Reorder
A
A
A
B
B
B
B
C
C
C
Daily
Daily
Daily
Weekly
Weekly
Weekly
Weekly
Montly
Montly
Montly
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Classification Results
Classification Kits
Class A
Class B
Class C
Sectional Kits 1,2,3
Top and Bottom Kits
Extendors and Nail Kits
Profit $ Volume of Use
71%
20.70%
8.30%
15%
25%
60%
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Class A items provide >71% to profit and are reviewed each day.

Class B items provide approximately 20.7% to profit and are
reviewed weekly.
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Items that contribute <8.% of profit are automatically ordered
once a month by the wholesaler, at no cost to Ruses Trusses.
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Fixed Time Re-order
Inventory
 Limited
applications such as:
– Small retail where demand is seasonal and it
fluctuates greatly.
– Great for simple inventory systems and floor
level inventory management applications.
– Perfect for job shop applications where
inventory is limited and seldom reviewed.
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Practical
Limitations of Fixed Time

Not suited for large SKU counts.
 Requires daily to weekly manual
supervision in various departments.
 Generally less automation than fixed
quantity re-order system.
 Focuses on minimum inventory which may
promote stock outs.
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Practical
Advantages of Fixed time
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Quickly adjusts to variations in demand.
Utilizes services provided by vendors at no cost to
the firm.
Assures minimum inventory when needed.
Minimizes inventory labor and costs.
Allocates resources where needed.
Establishes good relationships with distributors.
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Sources Referenced
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Richard J. Tersine, Principles of Inventory and Materials Management, third edition,
North-Holland , New York. 1988.
R. Fetter, Decision Models for Inventory Management, Ann Arbor London, 1978
Roberta S. Russel, Bernard W. Taylor 3rd, Operations Management, third edition,
Prentice Hall, Inc. Upper Saddle River, New Jersey. 2000
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