Let us say your friend Mike wants to buy basketballs from a factory & sell them to his neigborhood…

He estimates he’ll sell about 1,200 basketball per year. (Demand)

At first Mike thought of just buying a fixed 100 basketballs at the beginning of every month from the
factory, which will equal his 1,200 basketballs by the end of the year.

Problem is…

Mike worries that he doesn’t know when he might run out of basketballs.

If that happens, he’ll have to wait until next month to get a new batch of basketballs…

He might end up with no basketballs to sell until the next month, when a new delivery arrives.

He’ll have to send customer away.

His friend Lily suggest…

“You should order a new batch of basketballs even when you have only 50 basketballs remaining.
Just to be sure that you never run out.

His other friend and classmate Janet says…

“Lily, that’s too much! Mike should order a new batch of basketballs when he has only 1 or 2 balls left.
That should be good enough.

Lily is suggesting a RE-Order Point of 50 basketballs, while Janet is suggesting a “RE-Order Point” of 1 or
2 basketballs.

Let us say that every time Mike orders a new batch of basketballs, it takes 4 working days for the new
batch to be delivered (Lead Time). There are 250 working days/year.
Remember, Demand is 1,200 balls per year.

Again, who should Mike Listen to? Lily or Janet?

For this, we use the “RE-Order Point” Formula:

ROP= Demand per year x Lead Time

# of working days per year

ROP= 1,200/250 x 4

ROP= 4.8 x4

ROP= 19.2 OR 20 BASKETBALL REMAINING MIKE SHOULD IMMEDIATELY PLACE A NEW ORDER AS
SOON AS HE HAS ONLY 19.2 BASKETBALL REMAINING.