Economic order quantity (EOQ) is the order quantity of inventory that reduces the entire cost of inventory managing system. There are two most important types of inventory costs are ordering costs and carrying costs.
Ordering costs are costs that are experienced finding extra inventories. The ordering costs contain transport, administrative staff costs, receiving, acquired on communicating the order, inspecting costs, production set-up costs etc. and depend on the number of order.
Carrying costs denote the costs acquired on holding inventory in hand. Carrying costs contain the occasion cost of money held up in inventories, storage costs, spoilage costs, insurance premiums, taxes, inventory obsolescence etc. Holding costs depend on the level of inventory held, so influence to decrease as the quantity ordered decreases.
EOQ (Economic order quantity) calculator
EOQ calculator can be used by a business to control the ideal level of inventory units it should order from suppliers or, in the case of an industrial business, place in a manufacturing run.
It shows that Ordering costs and carrying costs are quite moving in opposite direction to each other when the quantity ordered changes. If we want to diminish carrying costs, we must place the small order which rises the ordering costs. If we want to diminish our ordering costs, place some orders in a year and this need insertion big orders which in go to increases the total carrying costs for the period. So, at some ideal level, the total costs will be at a minimum. This optimum level is stated as the economic order quantity or EOQ.
Formula to calculate EOQ
This formula is also called Wilson’s formula, through this, we can calculate the value of EOQ. This formula is written as;
Q = Economical/Optimal order quantity
P = Ordering costs (setting costs)
D = Demand in year
H = Holding costs
Holding costs can be:
CV (C = Interest, V = Products unit price)
CV + I (I = storage cost per unit)
What does the EOQ formula reveal?
Economic Order Quantity formula is that calculate the number of parts your business should be adding to inventory order. This is the main purpose and meant at falling the total costs of inventory management with all type of costs like order costs, holding costs, and shortage costs.
If you want to calculate your EOQ, following components that you need, your annual demand, fixed costs, and annual carrying the cost per unit. Fixed costs are the amount you must spend on getting stock, cover all the confirmation procedures, etc., while transfer costs are what you spend on storing and services.
It is very beneficial if you want to up and running the business, just essential to look over at past records to number out how much paid on getting stock and last year’s demand.