Question

Compare and contrast Fixed-Order-Quantity and Fixed-Order-Interval systems. What are the characteristics, advantages and disadvantages of each? Why FOI system requires a higher safety stock than the ROP system in order to achieve the same service-level? Explain.

Answer 1

Answer:

The Fixed-Order-Quantity method depends on when to order a fixed amount. The order will be placed when the inventory level reaches the reorder point. E.g. a new order is placed every time inventory level is below 100 units.

The Fixed-Order-Interval works differently, since the inventory level is checked every certain amount of time, and an order is made when the level is below an specific reorder point. E.g. inventory is checked every 2 weeks.

The main difference between both systems is that FOQ continuously checks the inventory level, while FOI checks the inventory level following a schedule. The FOQ should result in a more stable inventory level and number of orders.

The FOI requires a larger safety stock because the risk of selling more than expected always exists. E.g. you check inventory every 2 weeks, and you last checked a Tuesday. If suddenly a client places a large order on Wednesday, you are at risk of a stockout for 13 days.