
DETERMINING LOT SIZE 163
Reorder Points
Peter and Paul determine the amount of safety stock in soap and soda
that they think the Orvilles will need.If they “order” too soon, they’ll
have too much—but if they order too late, they’ll run out.They need to
balance the cost of holding inventory against the cost of shortage. They
discuss a reorder point decision when Peter mentions that he’ll simply
go to the store when he thinks he needs to.
In this context, the cost of shortage is manageable, since there is some
tolerance for stock- out built into the system. The store is so close, and
Peter’s availability is so flexible, that the setup cost fo