How to calculate reorder quantity
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Reorder quantity is the point at which a business must buy more inventory as to not run out of inventory during production. Reorder quantity is important to the business because if the business does not reorder its inventory, it will run out of inventory, which then creates production stoppages.
During the stoppages, firms will still need to pay their fixed costs.
Determine the maximum amount of inventory the business can use during a day. For example, Firm A running on maximum capacity requires 1,000 widgets.
Determine the lead time required to refresh inventory. This is the time it takes for the company to order inventory and receive the inventory. In this example, it takes Firm A 15 days to refresh its inventory.
- Reorder quantity is the point at which a business must buy more inventory as to not run out of inventory during production.
Determine the business's safety stock. Safety stock is stock the firm has on hand just in case. Using safety stock will minimise chances of the firm running out of inventory. In the example, the firm keeps 100 units of safety stock on hand.
Multiply the maximum daily usage by lead time. In the example, 1,000 units multiplied by 15 days equals 15,000 units.
Add the safety stock to the number calculated in Step 4. In this example, 15,000 units plus 100 units equals 15,100. This is the amount of remaining inventory that once the business reaches, the business must reorder more inventory in order to not miss any production time due to lack of inventory.
- Determine the business's safety stock.
- In the example, the firm keeps 100 units of safety stock on hand.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.