 Inventory Management

# How Do You Calculate Inventory Order? A surplus—or a deficit—of products will spin your inventory out of control. You can quickly experience a loss of revenue for your business—from missed sales or from products that sit on the shelf. What can you do to calculate inventory order accurately?

## How Do You Calculate Inventory Order?

To calculate inventory order, simply choose from three common formulas: economic order quantity (EOQ), reorder point (RPO), and just-in-time inventory (JIT). These formulas are essential to an inventory management system that keeps you stocked properly, without wasting money and time.

### Economic order quantity (EOQ)

EOQ is a formula that helps you determine the optimum number of products to order while minimizing order and storage costs. The calculation includes three factors:

• Demand (unit) rate – Annual usage or demand in units
• Setup (ordering) cost – Order processing costs, including the time and resources spent placing and receiving an order
• Production (carrying) cost – Cost to carry or store a product in inventory

The formula: √[(2×DS)÷P]=EOQ

The square root of [(2 times the annual demand in units times the setup cost) divided by (the production cost)]

Here’s a medical inventory example: Each year your company sells 3000 units (demand rate) of the medical instrument, S22. The order processing cost (setup cost) is \$4 per unit. It costs \$7 per unit to store (production cost) medical instrument, S22 in inventory. How many units of medical instrument, S22 should you order at a time? [(2 × 3000 4) ÷7] =59 units! If you order 59, S22 medical instruments at a time, it will minimize ordering and storage costs.

Although economic order quantity is a popular formula, you’ll need to recalculate it when demand rates or order processing costs fluctuate.

### Just-in-time (JIT)

JIT means ordering inventory items only when you need them—just before you’re out of stock. This method helps you avoid over-stocking. But it requires you to depend on the supplier. You might run low or run out of items before your supplier delivers them to you.

### Reorder Point

The reorder point formula calculates when to order an inventory item before it’s out of stock. The calculation includes three factors:

• Average daily usage or demand in units
• Number of days it takes to receive the order
• Safety stock, or additional quantity held to avoid completely running out

The formula: Average daily usage × your wait time for order delivery + amount safety stock = reorder point

Here’s a parts inventory example: Your company uses 50 units of part B15 daily. It takes five days to receive the order. 20 units of part B15 are in safety stock. 50 units×5 days+20 safety stock=270 units! When the quantity in stock for part B15 falls below 270, it’s time to reorder it.

## Use Inventory Management Software to Simplify Inventory Order Do these three methods of calculating inventory with formulas and figures seem overwhelming? Keeping better, more accurate inventory records can help you grab essential data faster, so calculating inventory formulas is a breeze. Other benefits of Sortly include: