Economic Order Quantity Calculator
This simple Economic Order Quantity (EOQ) calculator can be used for computing the economic (optimal) quantity of goods or services a firm needs to order. The calculator also offers a visualization of the EOQ model in graphic form.
What is Economic Order Quantity?
Economic Order Quantity is the ideal size of order that reduces the cost of holding adequate inventory and ordering costs to a minimum. This is one of the world's longest used classical models for production scheduling.
EOQ is calculated on the basis of several assumptions, which include:
- - the ordering cost is always the same
- - the purchase price is always the same
- - demand remains constant and so does lead time
- - order costs do not fluctuate depending on size of order
- - holding costs are reliant on average inventory
- - there is only one product involved in the calculation
The formula below is employed to calculate EOQ:
Economic Order Quantity (EOQ) = (2 × D × S / H) 1/2
D represents the annual demand (in units),
S represents the cost of ordering per order,
H represents the carrying/holding cost per unit per annum.
Example: If a company predicts sales of 10,000 units per year, the ordering cost is $100 per order, and holding cost is $50 per unit per year, what is the economic order quantity (in units) per order?
EOQ = ( 2 × Annual Demand × Ordering Cost / Holding Cost ) 1/2
EOQ = ( 2 × 10,000 × $100 / $50 ) 1/2
EOQ = ( 40,000 ) 1/2 = 200 units per order.
What is Economic Order Quantity Calculator
An Economic Order Quantity (EOQ) calculator is a tool used to determine the optimal order quantity for inventory management. The EOQ model aims to minimize the total cost associated with ordering and holding inventory.
Here's how a typical EOQ calculator works:
Demand: You input the annual demand or consumption rate for a particular product or inventory item. This represents the number of units that are used or sold within a given time period.
Ordering Cost: You input the cost incurred each time an order is placed. This includes expenses such as paperwork, processing, transportation, and any other costs associated with initiating a purchase order.
Holding Cost: You input the cost of holding or storing one unit of inventory for a specific period. This includes expenses such as warehousing, insurance, depreciation, obsolescence, and the opportunity cost of tying up capital in inventory.
EOQ Calculation: The EOQ calculator uses the formula:
EOQ = √((2 * Demand * Ordering Cost) / Holding Cost)
It calculates the square root of 2 multiplied by the annual demand, multiplied by the ordering cost, divided by the holding cost, to determine the economic order quantity.
The EOQ represents the ideal quantity that minimizes the total cost of ordering and holding inventory. By ordering this quantity at regular intervals, a company can achieve a balance between the costs of replenishing inventory and the costs of carrying excess stock.
The EOQ model assumes certain assumptions, including constant demand, fixed ordering and holding costs, and instant replenishment. Therefore, it may not be suitable for all inventory situations. Factors such as lead time, stockouts, and quantity discounts should also be considered when optimizing inventory levels.
Once the EOQ is calculated, additional calculations can be performed to determine the total cost of ordering, the total cost of holding inventory, and the reorder point (the inventory level at which a new order should be placed).
By using the EOQ model and calculator, companies can optimize their inventory management processes, minimize costs, and ensure adequate stock levels to meet customer demand.
It's important to note that the EOQ model serves as a guideline, and adjustments may be necessary based on specific business requirements and market conditions. Regular monitoring and adjustment of inventory practices are recommended to maintain optimal inventory levels and minimize costs.
Economic Order Quantity Calculator Example
Certainly! Here's an example of using the Economic Order Quantity (EOQ) formula to calculate the optimal order quantity for inventory management:
Let's assume the following information:
- Annual demand: 500 units
- Cost per order: $50
- Holding cost per unit per year: $2
To calculate the Economic Order Quantity (EOQ), you can use the formula:
EOQ = √((2 * Annual Demand * Cost per Order) / Holding Cost per Unit per Year)
Using the given values, we can substitute them into the formula:
EOQ = √((2 * 500 * 50) / 2)
This equation simplifies to:
EOQ = √(50000 / 2)
After evaluating the expression, the Economic Order Quantity (EOQ) would be approximately 158 units.
The Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity that minimizes the total costs of ordering and holding inventory. It takes into account the annual demand, the cost per order, and the holding cost per unit per year. By using the EOQ, businesses can strike a balance between carrying excess inventory (which incurs holding costs) and facing stockouts (which incurs ordering costs). Keeping the inventory close to the calculated EOQ helps streamline operations and optimize inventory management.