Working with an economic order quantity is a just one small piece of the inventory puzzle that contributes to greater efficiency. By managing your inventory with SOS Inventory software, your staff can save time and verify raw materials are always replenished at the appropriate time to meet demand while safeguarding your profits. You can automate purchase orders of raw materials whenever minimum thresholds (your predetermined reorder points) are met to ensure you are always meeting demand with consistent quality while minimizing your inventory costs as much as possible. When you manage your inventory with SOS Inventory software, the appropriate calculation for your inventory method is automatically determined. The alternative scenario entails facing shortages, loss of sales and production stoppages. When working with bare minimum quantities, predictability is a must for the process to be effective for your business. The economic order quantity model is not ideal for industries whose products fluctuate greatly in demand such as seasonal items. This gives you an EOQ quantity of 58 when rounded off. If the cost of materials to create one hat is $1.50, you sell 2,000 hats each year and the holding cost is $2, your EOQ formula would look like this: The EOQ quantity is the amount you will order each time your quantities drop to the minimum order point.Ĭalculating Safety Stock An Economic Order Quantity Example EOQ Formula Example The square root of that product gives you your EOQ quantity. ![]() Divide that product by the holding (storage) costs for one full year. To calculate EOQ, you will first multiply demand over the course of a year by the average acquisition cost per product and then multiply that number by two. ![]() ![]() Calculations are often performed on a yearly basis. When using the economic order quantity formula (aka minimum order quantity formula), you assume that demand, purchase orders and storage costs stay the same. The Economic Order Quantity Formula Economic Order Quantity Formula
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