How to Calculate Reorder Quantity

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Inventory is an important component of a business.
Inventory is an important component of a business. (Image: stock-taking image by Maksim Shebeko from Fotolia.com)

Reorder quantity is the point at which a business must buy more inventory so as to not run out during production. If a business does not reorder inventory in time and runs out, it can slow down or stop production. Calculating the reorder quantity allows the business to ensure it always has adequate inventory on hand.

Determine the maximum amount of inventory the business can use during a day. For example, say that 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, assume it takes Firm A 15 days to refresh its inventory.

Determine the business's safety stock. Safety stock is stock the firm has on hand just in case. Using safety stock will minimize chances of the firm running out of inventory. In the example, assume 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 it, it must reorder more inventory to avoid running out.

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