What Is A Fixed Order Point?
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Managing the supply of stock is notoriously difficult. There are lots of different balls that need to be juggled in the air to keep stock levels at their optimum levels. In addition there are demands made that stock levels must not be too high; but at the same time, stock outs must be avoided at all costs. So exactly what systems should be used to ensure that stock levels are kept at the right level?
Fixed Order Point System:
Any fixed order point system will monitor stock levels on a continuous basis. When the stock levels falls to a certain (fixed) point then an order is generated to replenish stocks.
So if the optimum stock levels is 100 units and the fixed order point is 90 units, then every time the stock levels fall to 90 units, an order is generated to replenish inventory.
Determining The Fixed Order Point
There are two main factors to be deliberated when establishing the fixed order point, namely what levels of stock need to be kept to ensure the smooth and uninterrupted flow within the production process and what is the economic order point i.e. when do orders present the best value for money?
Defining the optimum stock levels is difficult. There will always be fluctuations in demand and there will be a need to minimize stock, but conversely not to let stock levels become dangerously low.
The economic order point is also very difficult to establish because ordering too much of anything will be good value, but this can present difficulties in terms of housing stock until it is needed. Conversely if the orders are very low, then the costs associated with generating and processing the order will result in items costing more.
For example, to take this concept to its most basic, if an order is generated every time one single unit is used and some 10,000 units are used daily, then a business could not survive, because it would have to generate 10,000 orders every day and then process each single order as it is received, perhaps even generating 10,000 goods delivery notes per day and then face the administrative task of processing 10,000 invoices.
Obviously such a process is unfeasible, so the fixed order point has to be established at a point where it is economically viable within the grand scheme of the production process.
Advantages and Disadvantages to The Fixed Order Point System
The fixed order point system has been used for some time and keeps stock levels fairly stable. As a result this ensures that there are no stock outs unless there is a great level of fluctuations in demand.
The fixed order point will also have been set after the economic order quantity has been established, so the fixed order ensures that orders are placed when they are economically viable, so there is less wastage in terms of ordering supplies.
The fixed order point also enables the stock to be monitored and replenished with little human input. The technology assists to monitor stock levels and orders are generated automatically, so there is no risk of someone simply ‘forgetting’ to place an order.
The disadvantages are that demand cannot be known. There will always be fluctuations and there will always be times when the demand will not be able to be met, so the fixed order point cannot be as flexible as may sometimes be required.
The fixed order point also does not take into account the fact that costs will vary as the supply of raw materials fluctuates. This means that the economic viability of orders will change as time goes on, so the fixed order point needs to be re-assessed as time goes on.