|Developer||Business Research & Applications Limited|
|Added||Aug 1st, 2013|
If you run a company that needs to hold stock you know you face two major costs:(1) the cost of holding inventory, and(2) the cost of ordering.Both costs work in such a way that you need to balance them; there is a trade-off: stock too much and your holding costs will eat your profits, keep your ordering frequency at high levels and your ordering costs will increase.For the sake of supply chain management efficiency there are many models available. However, one of the most utilised systems is back from 1913, the ‘Economic Order Quantity’ (EOQ) model, developed by Production Engineer Ford Harris.Harris, F.M. (1913). ‘How many parts to make at once’. Factory, The Magazine of Management, 10(2), pp.135-136,152.This simple model allows to calculate the order size, and hereby the reorder point, that minimises the total cost of purchasing, ordering and holding stocks. The simplicity of the model resides in its ability to calculate such optimal quantity only considering three data:Demand, in units/time; which is considered to be constant.Ordering cost, in currency/order; it includes the cost of paperwork, outsourcing, inspection, setting up the facilities, shipping, handling, etc.Holding cost, in currency/(unit x time);you must consider your cost of capital, the risk of obsolescence, warehousing, insurances, etc.EOQ has many drawbacks and has been criticised because of the constant demand assumption, the stability of such demand or the costs, considering delivery lead-times are zero and/or not allowing for inventory shortages or capacity issues, or the inability to consider set-up quantities (integer quantities, fixed batches, and/or minimum orders), quantity discounts, or the existence of inflation. However, EOQ has proved either to be adaptable to incorporate such considerations either quite robust to changes in the average demand and/or costs ‘real’ values.This applications calculates the EOQ given an annual demand estimate, together with the total yearly orders and the total annual cost.If you consider demand is stochastic (not stable), then the calculator will make use of the ‘Newsvendor model’, and it will calculate the optimal monthly order given the selling price of the product, your costs, and the average monthly demand and its standard deviation.