Economic Order Quantity Calculator

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What is Economic Order Quantity?

Economic Order Quantity (EOQ) is a key inventory management indicator that helps firms decide the best order size to reduce total inventory expenses, including ordering and holding costs. EOQ is all about determining the magic number—the ideal inventory to order at once. The idea is to locate the point of equilibrium where the expenses of ordering and retaining inventory are balanced, so you don't order too often or keep too much stock. This allows you to reduce the total costs of ordering and holding inventory. Imagine not worrying about overstocking or running out of things at the worst time. This is where EOQ helps you.

Components of Economic Order Quantity

To calculate EOQ, you must know three things:

Demand: The total number of units you aim to sell over a given period. Knowing this helps you determine how frequently you should place orders.

Order Cost: Think of this as the fee you pay each time you place an order. It includes everything from delivery fees to time spent processing the order like delivery charges, handling fees, and processing costs. The less frequently you order, the lower your order costs.

Holding cost: This refers to the expense of keeping inventory in your warehouse. It covers storage costs, insurance, and even the expense of products becoming spoilt or outdated.

Why do you need the Economic Order Quantity Formula?

You may be wondering, "Why do I need the Economic Order Quantity Formula?" If you want to improve your inventory management and reduce wasteful costs, the EOQ formula is your go-to tool. It reduces overstocking and stockouts, allowing you to keep just the correct quantity of inventory. Calculating the appropriate order amount allows you to:

Reduce your overall inventory costs.
Improve cash flow.
Improve your supply chain efficiency.
Reduce waste and storage costs.

Economic Order Quantity Formula

The Economic Order Quantity formula is quite simple

EOQ = (2×Demand×Order Cost/Holding Cost)^½

Where:

Demand is the number of units required annually.

Order Cost is the cost of placing an order.

Holding Cost is the cost of holding one unit of inventory for a year.

Using this formula, you can calculate the optimal order quantity that minimizes your total inventory costs.

Assumptions While Calculating EOQ

The EOQ formula operates under certain assumptions that make it suitable for stable environments:

Constant Demand: The demand rate is stable throughout the year.

Fixed Order Cost: The cost of each order remains constant.

Constant Holding Cost: The cost of holding inventories remains constant.

No discounts: In case of a discount, it would not be possible to calculate accurate EOQ. However, buyers often purchase in bulk to get a discount which is advisable even if it fails the calculation of EOQ

How to Calculate Economic Order Quantity?

Let’s understand how to calculate EOQ with the help of a simple example. Suppose your business requires 1,200 units of a product annually. The cost to place an order is $50, and the holding cost per unit per year is $10.

Input these values into the EOQ formula:

EOQ= (2×1200×50/10)^½ = 109.545

So, the recommended order quantity is around 110 pieces. By ordering 110 items each time, you can reduce your overall inventory expenditures.

How to Use the Economic Order Quantity Calculator?

Our Economic Order Quantity Calculator optimizes the procedure even more. Simply enter your demand, order cost, and holding cost, and our calculator will handle the rest! It automatically calculates the optimal order quantity, saving you time and money.

Steps for using the calculator: