How To Calculate Optimal Reorder QuantityJanuary 6, 2021
You know how the saying goes, “More money, more problems.” The same applies to any eCommerce business’s inventory management: the more customers you have, the more SKUs you need, the harder it gets to manage it all.
Fail to manage your inventory correctly, and you might risk losing money by overstocking inventory that might expire before selling or losing customers if you run out of stock.
That’s why it’s so important to get your inventory levels right. To do so, you’ll have to know the reorder quantity formula. Many businesses rely on it to optimize their order quantity – minimizing their warehousing space, logistics costs, stockouts, and overstock costs as a result.
If you’re serious about getting your inventory management right, read on to understand how calculating reorder quantity can help you purchase the right amount of inventory more consistently.
What Is Reorder Quantity?
Before we do anything, we need to know what we’re calculating. Reorder quantity is the total number of product units requested from a supplier or manufacturer on an inventory replenishment purchase order. Ideally, the amount should not be so high you spend too much on inventory and warehousing, but not so little that you don’t have enough backup stock and risk selling out before reordering stock.
How Do You Calculate The Optimal Reorder Quantity?
You might be thinking, “Well, ordering the right amount of inventory is a no brainer, but how do you even do that? You can’t predict the future.” You’re right, but the reorder quantity formula can help you plan future stock levels using your sales history.
Let’s break it down. Optimal reorder quantity is calculated by a formula that multiplies average daily units sold by average lead time:
Optimal Reorder Quantity for a SKU = Avg. Daily Units Sold x Avg. Lead Time
If one of your SKU’s average daily sales is 15 and its average manufacturing lead time is 25 days (as in, the amount of time it takes to receive your product after placing a purchase order with your manufacturer) then your reorder quantity is 375 units.
But what if it’s the holiday season or you’re running a huge promotion? If you think your inventory velocity will rise, simply up your reorder quantity to avoid running out of stock.
In addition to calculating your reorder quantity, you’d also be wise to consider your reorder points.
Reorder Quantity and Reorder Point
It can be easy to confuse reorder points and reorder quantity. Reorder quantity is the number of products ordered from a supplier while the reorder point is the precalculated number of units you have left in stock at which you’ll need to reorder more inventory from your supplier before your risk running out of stock.
You need both metrics to avoid running out of stock and maximize cost-efficiency. Without a reorder point, you won’t know at which time to calculate your reorder quantity to determine the amount of stock you need to purchase.
Less Stocking Issues, More Savings
All in all, learning how to calculate reorder quantity can be a lifesaver for any eCommerce business. If you’re struggling with getting your inventory levels right, start using the reorder quantity formula to better plan your next stock purchase order.