Online Economic Order Quantity Calculator

To use our economic order quantity calculator, you’ll need three inputs:

• Annual demand – the quantity of units purchased per year

• Order cost – the fixed amount you pay each time you place an order

• Holding cost – the per-unit annual cost of carrying inventory

Annual demand does not need to be calculated. You should have a record of how many units were sold in a year. Just be sure to use the number of units sold rather than the value of those units when calculating EOQ.

Order cost, also known as cost per order (CPO), is the average cost required to place a purchase order. It includes all direct and indirect costs associated with this process.

To calculate CPO, follow these steps:

1. Document your purchase order process.
2. Calculate the average time for each step in the purchase order process.
3. Calculate the labour costs based on the total average time of the purchase order process.
4. Add any additional costs, such as overheads and shipping and handling fees.
5. Divide the total purchase order cost by the number of orders processed.

This will give you the figure required to input as your order cost for the EOQ calculation.

Annual holding cost is the per-unit cost of storing inventory.

To calculate it, you’ll need to know:

• Capital costs – the total cost of products or materials, including interest, fees, and maintenance costs
• Inventory service costs – the total cost of services related to carrying inventory, such as hardware and software costs, taxes, and insurance premiums
• Inventory storage costs – the total cost of owning and operating your inventory storage facility, including leasing costs, utilities, and shipping
• Inventory risk costs – the cost of risks that can reduce the value of your inventory or its saleability, such as inventory shrinkage fees and obsolescence
• Average inventory value – the average value of your on-hand inventory

Once you have these figures, you can use the annual holding cost formula to find the input you need to calculate economic order quantity.

The holding cost formula is:

When you have the required inputs, you can calculate your economic order quantity using the EOQ calculator above or with the EOQ formula.

The economic order quantity formula is:

The economic order quantity calculator helps you understand your ideal order size.

In other words, it tells you the optimal quantity of products or materials to order – and how frequently to order them – so as to minimise your costs and meet consumer demand.

Some of the biggest inventory management challenges businesses face include:

• Stockouts
• Overstocking
• Supply and demand fluctuations
• Inventory shrinkage

EOQ is a useful tool for combating these challenges. It helps you identify the sweet spot between purchasing sufficient quantities of inventory to meet demand and protect against fluctuation while keeping the costs of carrying and purchasing inventory as low as possible.

It’s important to remember that economic order quantity is just one way of calculating your ideal order size and determining purchasing decisions. While it can be a powerful formula for achieving these results, it also comes with some limitations.

Let’s take a look at some of the pros and cons of EOQ calculators.

Pros:

• Meet customer demand: EOQ leverages your business data to ensure you always have enough stock on hand to fulfil customer orders at a rate that satisfies demand.
• Minimise wasted spend: By ordering the optimal quantities of inventory, as determined by the EOQ formula, you can reduce the costs of overordering, shrinkage, obsolescence, and excess inventory.
• More efficient storage utilisation: When you attain the minimal necessary quantities of inventory to meet demand, you also improve the cost efficiency of inventory storage.

Cons:

• Doesn’t account for certain variables: EOQ doesn’t take into account factors like expiry dates for perishable inventory, seasonal fluctuations, promotions, and other events that can affect supply and demand.
• Not suitable for low order volumes: If you’re only placing a few orders per year, the averages you use as inputs for the EOQ formula may not be accurate enough to provide an optimal order quantity.
• Growth factor: If your business is scaling rapidly, the EOQ calculation may result in under-ordering as it’s based entirely on historical business performance – not accounting for the increasing rate of demand or sales growth.

To better understand the value of EOQ, let’s look at a hypothetical example.

Pete’s Welding Supplies is struggling to maintain the right levels of stock to meet demand for its products. To improve the efficiency of their purchasing, the company’s CPO uses the EOQ formula to calculate the ideal order size for their best-selling product.

He knows that:

• Annual demand for the product is 500 units

• The average order cost per purchase order is $3

• The annual holding cost per unit is $60

In this case, the EOQ calculation looks like this:

So, for Pete’s Welding Supplies, the ideal order size for its top-selling product based on the EOQ formula would be 10 units.