How to Calculate the Most Effecient Order Quantity or Economic Order Quantity- EOQ
Here is the scenario. You're considering how much inventory to buy for an online business. You know how much you've sold in the past so you're able to calculate the Average or Mean monthly or weekly sales (aka Demand). You are also able to calculate the Standard Deviation for this demand using your actual sales numbers. (If you don't know what your Demand and Std. Dev are, you should probably use your best guess.)
There are multiple configurations for this scenario. Is this a one-time event, e.g, you're ordering for the holidays or is this something where you have constant demand and you just need to establish an efficient Re-Order point that takes into consideration service level agreements, lost opportunities, ordering costs, and liquidation costs?
Here is the basic formula for Excel: =SQRT((2*DEMAND*ORDERING_COSTS)/(CARRYING_COSTS))
Where Demand= Number you expect to sell
Ordering Cost = The cost of placing the order (this is NOT the unit cost)
Carrying Cost = The cost of carrying inventory-this includes things like shrinkage, warehousing, etc. This should be calculated as a percentage of the unit cost. For example, if it costs me $10 for a widget and 10% to maintain it, the inventory carrying cost is = (10 *.10) = $1.
For a more detailed explanation, please see this website: Economic Order Quantity- EOQ
Also, see this Spreadsheet with some examples of One-Time event ordering. One Time Event Ordering.
I'll post some additional examples as soon as I get more time.
(Disclaimer- this is material adapted from an Operations Class at the University of Utah and not my original material)
