Management Notes

# Management Notes

Reference Notes for Management

# What does the poq interval equal?

## What does the poq interval equal?

Options:

A. the number of periods of average demand covered by the safety stock
B. the same number of periods that are on the “not to be rescheduled” side of the time fence
C. EOQ / maximum gross requirement
D. the number of periods until the incoming projected on hand runs out
E. EOQ / average demand per period

E. EOQ / average demand per period

Correct Answer Explanation: E. EOQ / average demand per period

The POQ (Periodic Order Quantity) is a concept used in inventory management to determine the timing and quantity of orders. It represents the time between consecutive orders for a particular item. The correct answer, E, states that the POQ interval equals the Economic Order Quantity (EOQ) divided by the average demand per period.

Let’s break this down. The Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs, balancing ordering costs and holding costs. It’s calculated using the square root of [(2 * demand * ordering cost) / holding cost per unit]. This formula helps in determining the ideal quantity to order for minimizing inventory expenses.

Now, the average demand per period is the total demand for an item divided by the number of periods. When you divide the EOQ by the average demand per period, you’re essentially determining how often you need to reorder (EOQ) based on the average consumption of the item within each period.

So, this calculation gives you the POQ, indicating the time interval between placing orders to maintain optimal inventory levels.

Why the Other Options are Incorrect:

A. The number of periods of average demand covered by the safety stock:

Safety stock is the extra inventory a company maintains to buffer against uncertainties in demand or lead time variability. It acts as a cushion to prevent stockouts. The number of periods covered by safety stock isn’t directly linked to the POQ.

Safety stock is typically determined based on factors such as demand variability, lead time variability, and service level targets. It ensures that there’s sufficient inventory to cover unexpected increases in demand or delays in supply, but it doesn’t determine the frequency or timing of orders (which is what the POQ represents).

B. The same number of periods that are on the “not to be rescheduled” side of the time fence:

In production and operations management, a time fence is a point in time that divides the planning horizon into two parts: the part where changes to the production schedule are allowed and the part where they are restricted.

The “not to be rescheduled” side indicates a period where changes to orders or schedules are not permitted. This concept is crucial for production planning and control but isn’t directly related to the POQ, which focuses on determining the optimal order quantity and timing to replenish inventory.

C. EOQ / maximum gross requirement:

The Economic Order Quantity (EOQ) is a calculation used to determine the optimal order quantity that minimizes total inventory costs. Dividing EOQ by the maximum gross requirement, which refers to the highest level of demand expected during a specific period, doesn’t yield the POQ.

The maximum gross requirement represents a peak demand scenario and isn’t directly linked to the timing between orders or the interval of replenishment, which is what the POQ signifies.

D. The number of periods until the incoming projected on hand runs out:

This option seems to touch upon the concept of a reorder point, which is the inventory level at which a new order should be placed to replenish stock before it runs out. However, it doesn’t directly relate to the POQ.

The reorder point is determined based on lead time, demand variability, and safety stock considerations, ensuring that new orders arrive before the stock depletes to unacceptable levels. The POQ, on the other hand, is specifically about the timing between orders based on the EOQ and average demand per period.

Understanding these distinctions is crucial in inventory management. While concepts like safety stock, time fences, maximum gross requirements, and reorder points are essential in maintaining efficient inventory levels, they are distinct from the concept of the POQ, which specifically focuses on the timing and quantity of orders based on EOQ and average demand per period.

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