Calculate the optimal order quantity to minimize total inventory costs. Perfect for supply chain management, inventory optimization, and procurement planning.
EOQ Calculator
Calculate the Economic Order Quantity (EOQ) to determine the optimal order size that minimizes total inventory costs, including holding and ordering costs.
Total units required per year
Fixed cost for each order placed
Cost to store one unit for one year
Economic Order Quantity
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Optimal order quantity
Total Ordering Cost
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Annual cost to place orders
Total Holding Cost
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Annual storage cost
Total Cost
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Combined annual inventory cost
Understanding EOQ
The Economic Order Quantity (EOQ) model helps businesses determine the optimal order quantity that minimizes total inventory costs, balancing ordering costs and holding costs.
Key Components
- Annual Demand: Total units required per year
- Order Cost: Fixed cost per order (paperwork, shipping, etc.)
- Holding Cost: Cost to store one unit for one year (warehousing, insurance, etc.)
EOQ Formula
EOQ = √(2 × Annual Demand × Order Cost ÷ Holding Cost)
When to Use EOQ
EOQ is most effective when demand is constant, ordering costs are fixed, and holding costs are linear. It's widely used in retail, manufacturing, and supply chain management.
Limitations
EOQ assumes constant demand and fixed costs. It may need adjustment for seasonal demand, bulk discounts, or production constraints.
Practical Applications
Use EOQ to optimize inventory levels, reduce storage costs, improve cash flow, and streamline procurement processes.
Frequently Asked Questions
What is the ideal number of orders per year?
Divide annual demand by EOQ. For example, 10,000 units with EOQ of 1,000 means 10 orders per year.
How does EOQ affect inventory turnover?
Proper EOQ increases inventory turnover by preventing overstocking while ensuring adequate supply.
Should I always order the EOQ amount?
EOQ is a guideline. Adjust for practical constraints like storage space, supplier minimums, or transportation costs.
How does bulk pricing affect EOQ?
Quantity discounts may justify ordering more than EOQ. Perform a cost-benefit analysis comparing savings vs. increased holding costs.
Optimizing Inventory Management
Effective inventory management balances having enough stock to meet demand without tying up too much capital in inventory. The EOQ model provides a mathematical approach to finding this balance.
Benefits of Proper EOQ
- Reduces total inventory costs
- Minimizes stockouts and overstocking
- Improves cash flow by reducing tied-up capital
- Streamlines ordering processes
- Provides data-driven ordering decisions
Advanced EOQ Considerations
- Safety Stock: Additional inventory to prevent stockouts from demand variability
- Reorder Point: Inventory level that triggers a new order (Lead Time Demand + Safety Stock)
- Quantity Discounts: When suppliers offer lower prices for larger orders
- Production Quantity: Modified EOQ for manufacturing (EPQ model)
