Practical use of Reorder Point and EOQ with Microsoft Dynamics AX

EOQ formula mentioned earlier is usually applicable to operations where demand is relatively steady. Even though, it can also be used in the cases where demand varies. In those cases the standard formula for EOQ can still be applied to shorter periods where demand is steady.

There are also some research papers available on the optimal order quantity calculation for changing demand, for exapmle: An Economic Order Quantity Model For Time-Varying Demand.

The reorder point can be automatically calculated in standard AX using Safety Stock journals. The functionality for automatic Economic Order Quantity calculations is available in Microsoft partner solutions, particularly for the wholesale industry.

Automatic calculation of EOQ should be used cautiously - you need to understand exactly what algorithm is used in the system and have correct input data required for EOQ calculation.

© Andrey Maslov

Reorder point and EOQ in standard functionality of AX 2009: using Master Planning for automatic replenishment

In standard AX automatic replenishment is realized by Master Planning functionality that can suggest you to buy, produce, or move certain quantity of your inventory:

Those suggestions (Planned orders) are based essentially on the current inventory (including e.g. purchase orders in process), forecast data (demand we expect) and item parameters.

The reorder point and order quantity (EOQ) can be set up in the coverage paramenters of the item. They need to be calculated manually and set up as Minimum (reorder point) and Maximum (order quantity) stock for specific location (site and warehouse). The Minimum and Maximum parameters can take different values in different periods for the same item - to adapt reorder point and economic order quantity for uneven forecasted demand.

© Andrey Maslov

Inventory management: reorder point and economic purchasing

In the assignment (see previous post) our decision making in regard to Inventory Management was focused on combination of only two parameters: reorder point and economic purchasing.

The reorder point is the inventory level that, when it’s reached, triggers new purchase ordering. The reorder point is calculated to ensure we won’t get short of materials while waiting for new purchase order to arrive. The reorder point usually embraces some reserved quantity – safety stock for the cases of higher demand than it was predicted:


Diagram based on picture from Managing Business Process Flow by Ravi Anupindi and others

The size of purchase order was to be a compromise between fixed costs per order and losing or earning interest on our cash balance, e.g. a large purchase order quantity could help us save on order fixed costs but might also cause more loses (opportunity cost) from interest that wouldn’t be earned. The optimal size of purchase order can be calculated using the formula for EOQ (Economic Order Quantity):



In case of our assignment, fixed cost per order was given to us, expected annual demand could be calculated based on sales forecast, and unit holding cost per year could be calculated based on annual interest we would lose if we buy one unit of material and keep it for one year. There are some considerations for practical use of this formula that I’ll mention later.

© Andrey Maslov