A bike shop orders 100 inner tubes every ten days, and each order costs 45.00 to place and ship. This EOQ (economic order quantity) calculator finds the order quantity with the lowest yearly cost of ordering plus holding stock.
| Order size | Orders a year | Days between orders | Ordering cost | Holding cost | Yearly cost |
|---|
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EOQ is short for economic order quantity: the number of units to order each time so that the cost of ordering plus the cost of holding stock is the lowest for a year.
EOQ = √(2 × annual demand × cost per order ÷ holding cost of one unit for a year)
Holding cost of one unit for a year = unit cost × holding % ÷ 100
Large orders cost less in ordering and more in holding. Small orders are the reverse. The EOQ is the size where the two costs are equal, and their sum is the lowest.
The formula assumes a steady demand and a fixed price. When the supplier gives a discount at a larger quantity, compare the yearly cost with the discount at that quantity too.
A bike shop sells 10 inner tubes a day, 3,650 a year. Each tube costs 4.00. Every ten days the owner orders 100 more.
Each order costs 45.00: 30.00 of shipping and half an hour of the owner's time. The owner takes 20 % a year as the cost of holding stock.
Small, frequent orders keep the shelf light. But what do 36 orders a year cost?
| Order size | Orders a year | Yearly cost |
|---|---|---|
| 100 (every 10 days) | 36.5 | 1,682.50 |
| 304 (once a month) | 12.0 | 661.90 |
| EOQ: 641 (every 64 days) | 5.7 | 512.64 |
| 1,282 (twice the EOQ) | 2.8 | 640.92 |
The small orders cost 1,682.50 a year. At the EOQ the cost is 512.64: 1,169.86 less, on one item.
The second result is less expected. One order a month costs 661.90, and twice the EOQ costs 640.92. Both are close to the lowest cost.
The expensive mistake is ordering far too often. An order size near the EOQ is almost as good as the EOQ itself, thus round it to a pack, a pallet or a calendar that suits you.
Put one item in each row: annual demand in column C, unit cost in D, cost per order in E and holding % in F. Then:
=ROUND(SQRT(2*C2*E2/(D2*F2/100)),0)=C2/H2=C2/H2*E2+H2/2*D2*F2/100The free workbook has these formulas for 200 items, the yearly cost of the quantity you order now, and the saving a year. Sort by the saving, largest first.
The economic order quantity: the order size with the lowest yearly cost of placing orders plus holding stock, for an item with a steady demand.
Use the demand of the months ahead, not of the last year, and calculate again when it changes. For a strong season, calculate the season and the rest of the year apart.
The reorder point says when to order: the stock that covers the lead time plus the safety stock. EOQ says how much. The reorder point calculator gives the first number.
Start with the shipping you pay per order, plus your time to order and receive at your own hourly rate. The EOQ changes with the square root of this cost: a cost twice as high gives an EOQ only 41 % larger.
Include the freight and duty that grow with the quantity in the unit cost; the landed cost calculator splits them per item. A fixed charge per order belongs in the cost per order.
On the Pro plan, set the cost per order and the holding cost once in the planning settings. Golden Inventory takes the demand of each item from your sales, adds the EOQ to the reorder point to set the order-up-to level, and tests the levels on your own history before you accept them.