How to use it
- Enter annual demand in units.
- Enter the cost of placing one order: admin time, delivery and inspection charges.
- Enter the holding cost per unit per year, or the unit cost and a yearly holding rate.
- Read the economic order quantity, the number of orders a year, the days between them and the costs.
The formula
EOQ = √(2DS / H)
- orders per year = D / EOQ;
- days between orders = days in the year / orders per year;
- annual ordering cost = orders per year × S;
- annual holding cost = EOQ / 2 × H (average stock is half an order);
- total = ordering + holding.
Worked example
Demand 1,000 units a year, 10 per order, holding 2 per unit per year:
EOQ = √(2 × 1,000 × 10 / 2) = √10,000 = 100 units. That is 10 orders a year, one every 36.5 days. Ordering costs 10 × 10 = 100 and holding 100 / 2 × 2 = 100, so the total is 200.00 a year.
If the unit costs 8 and holding is 25 % of that per year, H = 2 again and the answer is the same.
Tips
- The total cost curve is flat near the EOQ: ordering 80 or 120 units instead of 100 costs only a little more, so rounding to a pack size is fine.
- Use the same currency for order and holding costs; the result in units does not depend on which currency.
- Recalculate when demand or supplier charges change.