How to Best Use the Economic Order Quantity Calculator

What This Article Covers

  • Introduction to EOQ Calculator or EOQ Formula Calculator
  • How to Calculate Economic Order Quantity
  • Reorder Quantity Formula
  • EOQ for the Production Order Quantity or the Purchase Order Quantity
  • The Relationship Between the EOQ and the Forecast Error
  • Economic Order Quantity Calculator, EOQ Formula Calculator and a Quantity Discount Model
  • How the Economic Order Quantity Calculation Form Works to Calculate EOQ
  • The EOQ Calculator or Economic Order Quantity Calculator
  • What Do you Know About EOQ?
  • Our Work on EOQ

EOQ

Introduction to the EOQ Calculator or EOQ Formula Calculator

  • Economic order quantity (EOQ) is one of the oldest formulas in inventory management.
  • It was first developed by Ford W. Harris in 1913 (interestingly, as with the development of MRP, the originator of EOQ was not an academic).
  • This EOQ calculator or EOQ formula calculator will allow anyone to calculate EOQ quickly. One can calculate EOQ in a spreadsheet for a large number of product location combinations.

Reorder Quantity Formula

EOQ is one type of reorder quantity formula. Any reorder quantity formula can be used. All that has to occur is that the assumptions of the reorder quantity formula must be agreed to by the entity that intends to use it. Most software has a rather small number of options for its reorder quantity formula. However, when calculated externally, an entity can use any reorder quantity formula that it wants. It can then upload the results of the reorder quantity formula to their ERP or other supply planning system.

EOQ for the Production Order Quantity or the Purchase Order Quantity

EOQ can drive production order quantity as well as procurement order quantity. The production order quantity then drives the purchase order for the finished good. But once the finished good production order quantity is determined, the bill of material can be explored to determine the purchase order quantity. One of the criticisms of EOQ is that the bill of materials is not exploded. That is untrue as what are called requirements strategies can be set differently for every part of the bill of material. This is covered in my book on reorder point planning which is shown at the bottom of this article.

When companies search for a purchase order system or purchase order software

EOQ is not an adjustable formula, unlike the dynamic safety stock calculation, it has no ability to account for variability. Some have proposed that this means it cannot be used for more product location combinations (PLCs) with more variable demand history — and this is true — if the data provided to the EOQ is not periodically changed. Therefore, it must be periodically recomputed for the entire database.

This is the standard relationship between cycle stock and safety stock with a stable order quantity. The inventory is reduced by orders — hopefully only occasionally dipping into safety stock. 

Economic Order Quantity Calculator, EOQ Formula Calculator and the Forecast Error

The higher the forecast error, the less use the EOQ value is. This is because was the forecast error increases, the likelihood that the quantity will be consumed declines. However, this is not different from any other supply planning parameter. Supply planning parameters have the highest value when the forecast is most accurate.

EOQ Calculator with Quantity Discount Model

If there are quantity discounts, the calculation below will not be accurate. For instance, the formula below may propose an EOQ of 184 units. If the price per each at this level is $50, then this is a total cost of (184 * $50) + 45 or $9245.

If the quantity discount kicks it at 200 units and this discount is 15%, then 16 more units could be obtained for $8538. This would be a missed opportunity. This can easily calculate EOQ for an individual item, but this can not be systematized because supply planning applications do not have EOQ functionality or even step function min lot sizes. This means that when you purchase a system, it will in almost all cases not have a quantity discount model as part of its EOQ functionality. It is easy to create a quantity discount model as part of your EOQ externally and then import the hard coded EOQ values into the system. But normally calculating an EOQ with quantity discount model is not done. This is often seen as too much “work.” And rather than calculating things like EOQ with quantity discount model outside the system, there is a strong preference for many companies to use the software as is.

Rather than calculate EOQ, batching typically is handled by procurement as they are up to date on the volume discounts and will up the orders to meet the discount.

How the EOQ Calculator Form Works

This form requires input to provide output for the Economic Order Quantity Calculator. However, it also has default values. You can change any input value and the rest of the formula — the output will change immediately. You can continue making changes, and the form will always update without having to press any button or refresh.

This calculator assumes that the location receives the entire order at one time. However, this assumption does not always hold. For the noninstantaneous receipt, EOQ calculator see this link.

Also, learn about the limitations of EOQ at this link.

Conclusion

This is a way to calculate EOQ easily. The best way to calculate economic order quantity is normally in a system or a spreadsheet. One can calculate economic order quantity as one wishes and then upload the result to any supply planning system. There are many EOQ formulas and many ways to calculate EOQ that are different from the standard model. To calculate economic order quantity in a way that is different from the standard EOQ formula in ERP or other supply planning systems, to calculate economic order quantity is the way to go.

This page is provided to have a fast way to calculate economic order quantity and EOQ formula calculator online.

What Do You Know About EOQ?

EOQ Quiz

This quiz will test your basic knowledge level of EOQ.

Our Work on EOQ

If your company has questions on EOQ, you are in luck; we perform consulting on EOQ.

  • We can calculate any variety of different EOQ formula calculator for every product location combination.
  • We can ensure that the EOQ that we calculate is consistent with other supply and production planning parameters like production and procurement batch sizes, safety stock, etc.
  • We can also set EOQs to match the overall inventory investment that your company desires.
  • We can get the results back to you fast.
  • We can help you get it into your system as well as test it.

For more information fill out the form at the end of this page.

References

Plossl, George W. Production and Inventory Control: Principles and Techniques, Second Edition. Prentice Hall, 1985.

Plossel, George. Orlicky’s Material Requirement’s Planning. Second Edition. McGraw Hill. 1984. (first edition 1975)

Harris. Ford W. How Many Parts to Make at Once. Factory, The Magazine of Management. 1913.

Silver, Edward A. Peterson, Rein. Decision Systems for Inventory Management and Production Planning. Second Edition. John Wiley and Sons. 1985.

The background for the economic order quantity calcualtor is covered in the following book.

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

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