Calculating EOQ - Economic Order Quantity (Inventory Costs & Purchasing Costs)

This video explains how to calculate economic order quantity using the time-tested Wilson EOQ formula.

The video provides a step-by-step process to defining the economic order quantity for any company. It takes into consideration the company's annual or yearly consumption, the price it pays for each unit it purchases for its inventory, the cost to make that purchase and finally, the company's costs to hold inventory on a monthly basis.

Determining the annual or yearly consumption is fairly straightforward. Simply take a total of all the inventory of a given part used in a year. Next, take the amount your company pays for that part or raw material.

Determining your company's costs to purchase doesn't merely involve totaling your total volume multiplied by price. Instead, it's more about defining what it costs your company to make a purchase. How much does it cost your company to purchase from a vendor?

Your costs to purchase include time spent to approve and sign purchase requisitions. It also includes the time spent placing that order and sending it to your vendor. Next, the costs of inspecting the order are accounted for and finally, the costs of paying your vendor.

The Wilson EOQ formula involves doubling your yearly consumption total and multiplying it by your company's cost to purchase. This amount is then divided by the sum of the raw material or part's price multiplied by its inventory holding costs.

The Wilson EOQ formula is an excellent tool for making sure your company doesn't buy too much or too little.

[poultryworldindia]

Hi, it's very easy to teach technical aspects of any business manya times, but very difficult to explain techno-commercial aspect to understand most of the businesses, which is the main cause of many business failures, thanks a ton buddy

[bigshot]

That's an accurately drawn square root

[quinntoppolis]

Thank you for helping me in something I overlooked while studying for finals. You may have just saved my grade. Thank you, kind Sir.

[mlenzecele]

hi Ian i get lost when it comes to getting the 141 units all above is clear but from 20000 what do you do

[SEEpath-ktjm]

+Ian Johnson— I believe the units should be 1414 not 141. You are missing the last digit. If not can you explain why the EOQ would be 141 please?

[carmindamemije]

How did you get 141 units? I think you forgot to mention

[kristen]

This video was very helpful, however I have a question I’m needing help with. How do u work out the total cost, frequency of orders and time between orders?

[LuisGonzalez-hqlz]

Very good video just should be more clear and explain where the 141 units come. I figured out that is the square room of 20, 000 but should be more clear at the end.

[latigorapper]

Thanks for this. Just one question because I may have missed it... in the first part of the formula it's 2 (A) x CP or 2 x (3, 000) x CP... Where did the 2 come from? or is it something constant where the A or Annual usage will always be multiplied by 2?

[bilitoc]

Where did you use the 3000 units? I understand this is the demand, right? I believe the top part of the equation should be 2AD. A bit confused...Thanks!

[תומרשוורץ-ימ]

Thank you very much for this viseo. Ihave a question about managing inventory for buying groceries at the store or the market. I think in that case calculating purchasing and holding cost might be more difficult than the classic formula. In addition i find myself troubled calaculating the periodic rate of damand for example the weekly demand for bottle of milk. It is difficult more when i do not care the capacity of the refrigerator. for right now i am mapping the list of products that being purchased and their prices as well and by writing down in EXCEL spreadsheet the dates of buying groceries as well as purchase quntity and inventory for each product. is that a simple and practical method for reducing the toal cost for buying groceries?

[mitkovich]

I think the holding cost is not correct here. Normally it is considered that in average holding cost is between 20 and 30% per year. The average per mount is 2-3% which you use. However, the formula requires usage of the annual holding costs!!!

[downtoearth]

Hello Ian.  I've just started a course in Logistics and just started on this subject.  What is the final part of the equation to get at 141 units?  Thank you.

[nasirumohammed]

This clip is very simple, easy and straight to the point  for student understanding.

[Srushti_]

Thank you 👍very helpful video 💯❤from india sir

[mohanaramans]

bro do you know how to calculate inventory days and how to reduce the inventory day

[lawrenceelliot]

hi, how can I calculate the unit sales double, what is the percentage increase in the EOQ

[_Zoolu]

Hi Ian
Does purchasing cost include transportation?

[abaidaramex]

hi, nice video easy to understand and helpful, i have one question" how we can measure cost per unit which is lying in our warehouse" can you please give me formula for this.please keep continue to upload these sample. thanks

[stephanierivera]

How do you calculate in-transit carrying costs per unit?