Economic Order Quantity & Reorder Point

How to use it

Enter how many units you use a year, what placing one order costs, what a unit costs and what holding it for a year costs as a share of that. Add your working days, the supplier’s lead time and how many days of safety stock you keep. The result is the order size with the lowest combined ordering and holding cost, and the stock level at which to reorder.

Where the number comes from

• Holding cost per unit per year is unit cost times the holding percentage.
• Economic order quantity is the square root of 2 × annual demand × cost per order ÷ holding cost per unit. Ordering more at a time means fewer orders but more stock sitting on the shelf; this is the size where the two costs balance.
• Orders per year is annual demand divided by the order quantity, and the days between orders is working days divided by orders per year.
• Annual ordering cost is orders per year times cost per order. Annual holding cost is half the order quantity (the average cycle stock) plus the safety stock, times holding cost per unit.
• Daily demand is annual demand divided by working days. Safety stock in units is daily demand times the safety days, and the reorder point is daily demand times lead time plus safety days.
• Average inventory value is half the order quantity plus the safety stock, valued at unit cost.
• The table prices order sizes from a quarter of the EOQ to three times it, so you can see how much a rounder or larger order really costs.

What goes wrong

The part most calculators leave out.

• The formula assumes demand is steady through the year. Seasonal or lumpy demand needs the calculation run per season, or the order size will be wrong in both the peak and the trough.
• It assumes the unit price does not change with order size. A bulk discount can beat the EOQ: add unit cost × annual demand to the table’s total at the discount quantity and at the EOQ, and compare the two sums.
• The holding percentage is usually underestimated. Storage and insurance are visible; obsolescence, shrinkage, handling and the cost of the cash tied up are not, and leaving them out pushes the order size up.
• Lead time is treated as fixed. If the supplier’s lead time varies, safety stock expressed as days of average demand may be too little — the reorder point protects only against delays up to the safety days entered.
• Cost per order should include only costs that rise with the number of orders. Fixed purchasing salaries that do not change with order count overstate it and inflate the order size.

Questions

What is the economic order quantity?

The order size that minimises the combined cost of placing orders and holding stock over a year. Small orders mean many orders and high ordering cost; large orders mean a lot of stock on the shelf and high holding cost. EOQ is the size where the two are equal.

How is the reorder point different from the order quantity?

The order quantity is how much to order. The reorder point is when to order: the stock level that still covers demand during the supplier’s lead time, plus any safety stock. One sets the size of each order, the other its timing.

Does the EOQ have to be followed exactly?

No. The total cost curve is flat around the EOQ, so rounding to a case, pallet or supplier minimum somewhat above or below it usually costs very little. The table shows exactly how little for your figures.

What should holding cost include?

Everything it costs to keep a unit for a year: storage space, insurance, handling, shrinkage, obsolescence and the return you could earn on the cash tied up. It is entered as a percentage of unit cost because most of those scale with the value of the stock.

Does anything I type get sent anywhere?

No. The whole calculation runs in your browser. Nothing is sent to us or logged, and there is no account to create. Your browser keeps the figures with this tab’s history so that Back and Reload bring them back, and Reset clears them.