How to Calculate Inventory

Inventory Management Calculator

Calculate Economic Order Quantity, Safety Stock, and Reorder Point.

Economic Order Quantity (EOQ)

Safety Stock

(Optional: Fill these to calculate Safety Stock automatically for Reorder Point)

Reorder Point

(Safety Stock will be calculated from above inputs if provided, otherwise use manual input)

Results:

Economic Order Quantity (EOQ): —

Safety Stock: —

Reorder Point: —

function calculateInventoryMetrics() { // Get EOQ inputs var annualDemand = parseFloat(document.getElementById('annualDemand').value); var orderingCost = parseFloat(document.getElementById('orderingCost').value); var holdingCost = parseFloat(document.getElementById('holdingCost').value); // Get Safety Stock inputs var maxDailyUsage = parseFloat(document.getElementById('maxDailyUsage').value); var avgDailyUsage = parseFloat(document.getElementById('avgDailyUsage').value); var maxLeadTime = parseFloat(document.getElementById('maxLeadTime').value); var avgLeadTime = parseFloat(document.getElementById('avgLeadTime').value); // Get Reorder Point inputs var dailyDemand = parseFloat(document.getElementById('dailyDemand').value); var leadTimeROP = parseFloat(document.getElementById('leadTimeROP').value); var safetyStockManual = parseFloat(document.getElementById('safetyStockManual').value); var eoq = NaN; var safetyStock = NaN; var reorderPoint = NaN; // Calculate EOQ if (!isNaN(annualDemand) && annualDemand > 0 && !isNaN(orderingCost) && orderingCost >= 0 && !isNaN(holdingCost) && holdingCost > 0) { eoq = Math.sqrt((2 * annualDemand * orderingCost) / holdingCost); document.getElementById('eoqResult').innerHTML = 'Economic Order Quantity (EOQ): ' + eoq.toFixed(0) + ' units'; } else { document.getElementById('eoqResult').innerHTML = 'Economic Order Quantity (EOQ): Invalid inputs for EOQ.'; } // Calculate Safety Stock var safetyStockCalculated = NaN; if (!isNaN(maxDailyUsage) && maxDailyUsage >= 0 && !isNaN(avgDailyUsage) && avgDailyUsage >= 0 && !isNaN(maxLeadTime) && maxLeadTime >= 0 && !isNaN(avgLeadTime) && avgLeadTime >= 0) { safetyStockCalculated = (maxDailyUsage * maxLeadTime) – (avgDailyUsage * avgLeadTime); if (safetyStockCalculated < 0) safetyStockCalculated = 0; // Safety stock cannot be negative safetyStock = safetyStockCalculated; document.getElementById('safetyStockResult').innerHTML = 'Safety Stock: ' + safetyStock.toFixed(0) + ' units'; } else { document.getElementById('safetyStockResult').innerHTML = 'Safety Stock: Not enough inputs to calculate.'; } // Determine Safety Stock for Reorder Point var finalSafetyStockForROP = 0; if (!isNaN(safetyStockManual)) { finalSafetyStockForROP = safetyStockManual; } else if (!isNaN(safetyStockCalculated)) { finalSafetyStockForROP = safetyStockCalculated; } // Calculate Reorder Point if (!isNaN(dailyDemand) && dailyDemand >= 0 && !isNaN(leadTimeROP) && leadTimeROP >= 0) { reorderPoint = (dailyDemand * leadTimeROP) + finalSafetyStockForROP; document.getElementById('reorderPointResult').innerHTML = 'Reorder Point: ' + reorderPoint.toFixed(0) + ' units'; } else { document.getElementById('reorderPointResult').innerHTML = 'Reorder Point: Invalid inputs for Reorder Point.'; } }

Understanding and Calculating Inventory

Effective inventory management is crucial for any business that deals with physical products. It involves balancing the costs of holding inventory against the costs of not having enough inventory (stockouts). Calculating key inventory metrics helps businesses optimize their stock levels, reduce costs, and improve customer satisfaction.

What is Inventory Calculation?

Inventory calculation refers to the process of determining optimal stock levels, reorder points, and order quantities to ensure smooth operations while minimizing costs. It involves analyzing various factors such as demand, lead times, ordering costs, and holding costs. By accurately calculating these metrics, businesses can avoid overstocking (which ties up capital and incurs storage costs) and understocking (which leads to lost sales and customer dissatisfaction).

Economic Order Quantity (EOQ)

The Economic Order Quantity (EOQ) is a formula used in inventory management that determines the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. The goal of the EOQ model is to identify the optimal number of product units to order so that the total cost of ordering and carrying inventory is minimized.

The formula for EOQ is:

EOQ = √((2 × Annual Demand × Ordering Cost) / Holding Cost)

• Annual Demand (D): The total number of units demanded annually.
• Ordering Cost (S): The fixed cost incurred each time an order is placed (e.g., administrative costs, shipping fees).
• Holding Cost (H): The cost of holding one unit of inventory for one year (e.g., storage costs, insurance, obsolescence).

Example: A company sells 12,000 units of a product annually. The cost to place an order is $50, and the holding cost per unit per year is $5.
EOQ = √((2 × 12,000 × 50) / 5) = √(1,200,000 / 5) = √240,000 &approx; 490 units.
This means the company should order approximately 490 units each time to minimize total inventory costs.

Safety Stock

Safety stock is an extra quantity of inventory held to prevent stockouts due to unexpected demand fluctuations or delays in supply (lead time variability). It acts as a buffer against uncertainties in the supply chain, ensuring that customer demand can still be met even if there are unforeseen issues.

A common formula for calculating safety stock is:

Safety Stock = (Maximum Daily Usage × Maximum Lead Time) − (Average Daily Usage × Average Lead Time)

• Maximum Daily Usage: The highest recorded daily consumption of the product.
• Average Daily Usage: The typical daily consumption of the product.
• Maximum Lead Time: The longest time it has taken for an order to arrive.
• Average Lead Time: The typical time it takes for an order to arrive.

Example: A product has a maximum daily usage of 40 units and an average daily usage of 30 units. The maximum lead time is 10 days, and the average lead time is 7 days.
Safety Stock = (40 × 10) − (30 × 7) = 400 − 210 = 190 units.
The business should hold 190 units as safety stock to mitigate risks.

Reorder Point (ROP)

The Reorder Point (ROP) is the minimum level of inventory that triggers a new order. It ensures that new stock arrives before existing stock runs out, taking into account daily demand and lead time. The ROP helps maintain continuous operations and avoids stockouts.

The formula for Reorder Point is:

Reorder Point = (Daily Demand × Lead Time) + Safety Stock

• Daily Demand: The average number of units sold or used per day.
• Lead Time: The number of days it takes for an order to be delivered after it's placed.
• Safety Stock: The buffer inventory held to prevent stockouts (as calculated above or a predetermined amount).

Example: A product has an average daily demand of 30 units, and the lead time for new orders is 7 days. Based on previous calculations, the safety stock is 190 units.
Reorder Point = (30 × 7) + 190 = 210 + 190 = 400 units.
When the inventory level drops to 400 units, a new order should be placed.

Conclusion

By utilizing tools like the Inventory Management Calculator and understanding the principles behind EOQ, Safety Stock, and Reorder Point, businesses can significantly improve their inventory control. This leads to reduced costs, enhanced operational efficiency, and ultimately, greater customer satisfaction and profitability.