Companies that hold stock face two major costs: holding cost, and ordering. Both costs work in such a way that managers 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. One of the most utilised systems is the ‘Economic Order Quantity’ (EOQ) model, developed by Production Engineer Ford Harris.
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 demand, and the ordering and holding costs.
This application calculates the EOQ given an annual demand estimate, together with the total yearly orders and the total annual cost.
Further, you can choose to calculate the EOQ when shortages may arise; the possibility of shortages may come from either a technical perspective (it is possible to backorder), or from a commercial possibility (customers do not cancel an order whenever there is no inventory available and wait for the backordering process).
As an additional option, if you consider your demand is uncertain, the calculator will make use of the 'Newsvendor model' and will calculate the optimal monthly order given the selling price of the product, your costs, and the average monthly demand and its standard deviation. This is the most used models to calculate the optimal order size when demand is unknown and only the demand mean and variance is known.