The Economic Order Quantity (EOQ) is a fundamental concept in inventory management. It's a formula used by businesses to determine the ideal quantity of inventory to order at a time to minimize the total costs associated with ordering and holding inventory. The goal is to strike a balance: ordering too much incurs high holding costs, while ordering too little leads to frequent orders and higher ordering costs.
The EOQ Formula
The EOQ formula is derived from a model that assumes consistent demand, fixed ordering and holding costs, and no stockouts.
The formula is as follows:
EOQ = √((2 * D * S) / H)
Where:
D = Annual Demand (the total number of units expected to be used or sold in a year).
S = Ordering Cost per Order (the fixed cost incurred each time an order is placed, including costs like processing, shipping, and receiving).
H = Holding Cost per Unit per Year (the cost of holding one unit of inventory for one year, including costs like storage, insurance, spoilage, and the opportunity cost of capital tied up in inventory).
How the Calculator Works
Our calculator takes your provided values for Annual Demand (D), Ordering Cost per Order (S), and Holding Cost per Unit per Year (H) and applies the EOQ formula to calculate the economically optimal order quantity.
The calculator first validates your inputs to ensure they are non-negative numbers. If valid, it calculates:
2 * D * S: This part of the formula accounts for the total annual cost impact of ordering.
(2 * D * S) / H: Dividing by the holding cost normalizes the ordering impact by the cost to hold inventory.
√((2 * D * S) / H): The square root of the result gives you the EOQ, the optimal number of units to order each time to minimize total inventory costs.
Use Cases and Benefits
Cost Reduction: The primary benefit is minimizing the sum of ordering and holding costs.
Inventory Optimization: Helps businesses avoid overstocking or understocking.
Improved Efficiency: Streamlines procurement and inventory management processes.
Strategic Planning: Provides a data-driven basis for inventory policies.
It's important to remember that the EOQ is a theoretical model and assumes certain conditions. Real-world factors like bulk discounts, variable demand, lead times, and storage capacity limitations may necessitate adjustments to the EOQ. However, it remains a powerful starting point for effective inventory management.
function calculateEOQ() {
var annualDemand = parseFloat(document.getElementById("annualDemand").value);
var orderingCost = parseFloat(document.getElementById("orderingCost").value);
var holdingCostPerUnit = parseFloat(document.getElementById("holdingCostPerUnit").value);
var resultDiv = document.getElementById("result");
var eoqValueSpan = document.getElementById("eoqValue");
if (isNaN(annualDemand) || isNaN(orderingCost) || isNaN(holdingCostPerUnit) ||
annualDemand < 0 || orderingCost < 0 || holdingCostPerUnit < 0) {
alert("Please enter valid non-negative numbers for all fields.");
resultDiv.style.display = 'none';
return;
}
if (holdingCostPerUnit === 0) {
alert("Holding cost per unit cannot be zero as it would lead to infinite EOQ.");
resultDiv.style.display = 'none';
return;
}
var eoq = Math.sqrt((2 * annualDemand * orderingCost) / holdingCostPerUnit);
eoqValueSpan.textContent = eoq.toFixed(2) + " units";
resultDiv.style.display = 'block';
}