Welcome to the: 
Supply Chain Systems,
Tool Box

Purchasing Decision - Order Quantity
ORDERING COSTS
Enter numbers; Results automatically calculate after a few seconds.
Annual Consumption: units per yearOrder Quantity: units
Ordering Cost:
$ per order		   Annual Ordering Cost: $ per year

INVENTORY HOLDING COST
Delivered Unit Cost:
$ per unit		Carrying Cost Rate: per year
Holding Cost   
$ per year		Current Total Cost:
$ per year

EOQ Lot Size:
units		EOQ Order Cost: $ per year
EOQ Holding Cost: $ per yearEOQ Total Cost: $ per year

SAVINGS = $ per year
  • One key purchasing decision is - how much should be ordered at any point in time. This is similar to the manufacturing decision of determining the Lot Quantity. In manufacturing, there is a trade-off between set-up costs and inventory carrying costs. In purchasing, the trade-off is between ordering costs and inventory carrying costs.
  • The calculator above first calculates the Annual Ordering Cost then the Inventory Carrying Cost over that same period of time.
  • Finally, the Economic Order Quantity (EOQ), the trade-off between ordering costs and inventory costs, is calculated.

    • The EOQ basically tells you how many times per year a raw material or component should be ordered. If the annual usage is 1000 units per year and the EOQ was 333 units then the material should be ordered three times per year. Usage (consumption, dependent demand) over the year is not typically uniformed. Therefore, the amount that should be ordered would be enough to last for one third of the year each time it was ordered.

    Some better ERP / MRP systems provide a rule for automatically calculating order quantities, Lot Sizes. Either, the system can - dynamically calculate the EOQ or provide a Lot Size rule that covers a specified period of time. If the later is the case then once per year you should use the calculator above to determine what that time frame should be, in the manner that was just described. Consider using these options over just putting in a fixed Lot Size number into the ERP system. This alone can provide an inventory savings and prevent carrying unnecessary inventory when it is not needed.

    EOQ assumes that demand is uniformed over the year. So, the use of this algorithm is imperfect, but keep in mind that it is better than not using it and ignoring the trade-offs that are often made in supply chain decision-making. Supply chain decision-making implies that the whole picture is taken into account (cross-functionally) and leads ultimately to a better bottom-line.

    If this type of web page is helpful to you then please contact us and let us know. This will encourage us to do more pages like it.
    Supply Chain Systems, Inc.
    (305) 216-6377
    mjm@supply-chain-systems.com