Reorder Quantity Calculator

The underlying calculation

Reorder quantity is how much to order once the reorder point has been reached. Under a fixed-quantity system it is the economic order quantity, adjusted for practical constraints. Under a periodic system it is target level minus stock on hand minus stock on order.

The second form is the one most software uses, and the stock-on-order term is the one most often left out by hand. Forgetting it means reordering a quantity already in transit, which is how a business ends up with three deliveries of the same product in a fortnight.

Worked through

Target level 434 units, that is the reorder point of 154 plus an order quantity of 280. Stock on hand is 154, stock on order is zero.

Reorder quantity is 434 − 154 − 0 = 280 units, which matches the EOQ as it should.

Now suppose 120 units are already in transit from a partial earlier shipment. The correct quantity becomes 434 − 154 − 120 = 160. Ordering 280 anyway would land 400 units against a target of 434 and leave the product sitting at 15 weeks of coverage rather than eleven.

Where it goes wrong

The EOQ is a starting point and is routinely overridden by supplier minimums, case packs, pallet quantities and container fills. Since the cost curve around the optimum is flat, rounding to any of these costs very little and simplifies the operation considerably.

It also assumes a single order at a single price. Where a volume break sits just above the calculated quantity, the discount has to be weighed against the extra carrying cost rather than taken automatically.

Making it useful

Round to the nearest practical unit, case, layer or pallet, and let the flat cost curve absorb it. A 280-unit EOQ that becomes 288 to fill twelve cases of 24 costs perhaps 0.1% in total cost and saves a repack every cycle.

Then always subtract stock on order. It is a single term and leaving it out is the most common cause of accidental overstock in businesses that order by hand.

Evaluating a volume break properly

A supplier offering a lower unit price at a higher quantity is offering an immediate saving against an ongoing carrying cost, and the comparison is straightforward once both sides are annualised.

Take the example: 280 units at $18, or 600 units at $17.10 for a 5% discount. The saving is 600 × $0.90 = $540 per order. But the average cycle stock rises from 140 to 300 units, adding 160 units × $17.10 × 25% = $684 a year in carrying cost, against fewer orders saving 3.9 × $85 = $332.

Net, the break costs $684 and saves $872. It wins, but by $188 rather than by the $540 the discount appeared to offer. That margin is thin enough that any obsolescence risk on the larger quantity would reverse it, which is exactly why the calculation is worth running rather than assuming a discount is free money.

The economic order quantity formula assumes steady demand, a fixed ordering cost and constant unit price, and real suppliers violate the third routinely through volume breaks. Where price breaks exist, the correct method is to calculate total cost at the economic quantity and at each break quantity and compare, since the break frequently beats the theoretical optimum.