The ROP greater than the EOQ How is this situation handled R

The ROP greater than the EOQ. How is this situation handled?

ROP is 160 and the EOQ is 149.07.

Solution

ROP is the re-order point which takes average demand and lead time into consideration. It is the amount of stock level which when reached stocks have to be re ordered. ROP ensures that there is no stock out scenario.

EOQ is the economic order quantity which gives us the order size for which the costs are the minimum. EOQ is for saving costs.

When ROP is greater than EOQ, we need to compare opportunity loss cost when EOQ is followed against Extra cost incurrred when ROP is followed.

>When EOQ is followed, there would be stock out situations and it is a sale loss. The loss to the company due to sale loss has to be calculated.

>If ROP is followed, costs would be higher than the case when EOQ is used. This additional cost has to be calculated.

Both loss to company due to sale loss and additional cost when ROP is used have to be compared with and whichever option minimizes the cost or loss has to be chosen.