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Calculation of reorder point when lead time and demand are correlated

Author

Listed:
  • Juan Manuel Izar Landeta

    (Universidad Autónoma de San Luis Potosí)

  • Carmen Berenice Ynzunza Cortés

    (Universidad Tecnológica de Querétaro)

  • Enrique Zermeño Pérez

    (Universidad Autónoma de San Luis Potosí)

Abstract

This paper presents a comparative study of calculating the reorder point when the daily demand for goods is independent of lead time or when both variables are correlated. The study is done for an article with normal demand and lead time. For the illustrative case there has not been significant difference of reorder point calculated with both methods, which is due to the low correlation between the 2 variables. If correlation coefficient takes negative or positive high values, then the differences in calculated reorder point with the two methods are significant. These differences also depend on the service level managed. If the correlation coefficient is positive, the traditional methodology underestimates the reorder point and it overestimates if the correlation between demand and delivery time is negative. Therefore it is recommended that before estimating the reorder point, to calculate the correlation coefficient between the 2 variables and apply the Wang equations if the coefficient falls between -0.5 and -1 or between 0.5 and 1. If the service level increases, the reorder point so does, requiring a larger inventory.

Suggested Citation

  • Juan Manuel Izar Landeta & Carmen Berenice Ynzunza Cortés & Enrique Zermeño Pérez, 2015. "Calculation of reorder point when lead time and demand are correlated," Contaduría y Administración, Accounting and Management, vol. 60(4), pages 864-873, Octubre-D.
    • Handle: RePEc:nax:conyad:v:60:y:2015:i:4:p:864-873
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