Economic Order Quantity Calculator
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What is Economic Order Quantity?
Economic Order Quantity (EOQ) is a crucial inventory management formula that determines the optimal order quantity to minimize total inventory costs. It balances two main cost components: ordering costs (costs associated with placing orders) and holding costs (expenses for storing inventory). EOQ helps businesses maintain efficient inventory levels while reducing unnecessary expenses.
The EOQ model assumes several conditions: constant demand rate, fixed ordering and holding costs, complete order delivery, and no stockouts. While these assumptions may not perfectly match real-world conditions, EOQ remains a valuable tool for inventory management decision-making.
How to Calculate Economic Order Quantity
Step 1: Determine your annual demand in units. This should be based on historical data or accurate sales forecasts.
Step 2: Calculate your order cost per purchase order. Include costs like shipping, handling, and administrative expenses.
Step 3: Calculate your annual holding cost per unit. Consider warehouse expenses, insurance, depreciation, and opportunity costs.
Step 4: Enter these values into the respective fields in the calculator.
Step 5: Review the calculated EOQ result and the detailed explanation provided.
Step 6: Use the number of recommended orders per year to establish your ordering schedule.
Step 7: Monitor and adjust your inventory management strategy based on the EOQ calculations and actual business conditions.