Calculate the Economic Order Quantity (EOQ) to determine the optimal inventory order size that minimizes total holding and ordering costs.
EOQ Calculator (Economic Order Quantity)
Determine the optimal quantity of inventory to order at a time to minimize the sum of ordering costs and holding costs using the Economic Order Quantity formula.
Calculate EOQ
Understanding Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity a company should purchase for its inventory given a set cost of production, demand rate, and other variables. The goal is to minimize the total costs associated with ordering and holding inventory.
The Formula
The basic EOQ formula is:
$EOQ = \sqrt{\frac{2DS}{H}}$
Where:
- D = Annual Demand (in units)
- S = Ordering Cost (cost per purchase order, including processing, shipping, etc.)
- H = Annual Holding Cost (cost to hold one unit in inventory for one year, including storage, insurance, obsolescence, opportunity cost of capital, etc.)
The EOQ model aims to find the balance point where the cost of ordering inventory and the cost of holding inventory are minimized. Ordering smaller quantities more frequently increases ordering costs but reduces holding costs. Ordering larger quantities less frequently reduces ordering costs but increases holding costs. EOQ identifies the "sweet spot".
Assumptions & Limitations
The basic EOQ model operates under several key assumptions:
- Demand is constant, uniform, and known.
- Ordering cost per order is fixed and constant.
- Holding cost per unit per year is fixed and constant.
- Lead time (time between placing and receiving an order) is constant and known.
- Purchase price per unit is constant (no quantity discounts).
- Orders are received in full at one time.
- Stockouts are not permitted.
In reality, these conditions rarely hold perfectly. Therefore, EOQ is often used as a baseline or starting point for inventory decisions, potentially adjusted by more advanced models or practical considerations.
Frequently Asked Questions (FAQs)
What are holding costs?
Also known as carrying costs, these are the costs associated with storing inventory. They include storage space costs, insurance, taxes, spoilage, obsolescence, and the opportunity cost of the capital tied up in inventory.
What are ordering costs?
These are the fixed costs incurred each time an order is placed with a supplier, regardless of the quantity ordered. Examples include clerical costs for preparing purchase orders, receiving and inspection costs, and transportation setup costs.
How is the holding cost (H) calculated if I only know the percentage?
Often, holding cost is expressed as a percentage of the inventory item's value (purchase cost). If so, H = (Holding Cost Percentage) * (Cost per Unit). Make sure to use the *annual* holding cost percentage.
Is EOQ useful if demand fluctuates?
The basic EOQ model assumes constant demand. If demand is highly variable, other inventory models like safety stock calculations or probabilistic models might be more appropriate alongside or instead of EOQ.
Does EOQ account for quantity discounts?
The basic formula does not. If quantity discounts are available, you would need to calculate the total annual cost (including purchase cost) for the EOQ quantity and compare it to the total annual costs at the discount quantity break points to find the true optimal order size.
