Safety Stock Formula and Economic Order Quantity (EOQ)
The economic order quantity, EOQ, calculates the least expensive number of units to order. This calculation is also known as the Wilson formula. Businesses can use EOQ to meet demand while reducing the costs of ordering and holding inventory. The aim is to hold as little stock and safety stock while reducing extra inventory as needed to cover market demand without increasing overhead costs of product delivery and storage.
To determine the EOQ or optimum lot size, you will need to know three variables:
- Holding costs: Total cost of holding inventory, including storage, employee salaries, opportunity costs, and depreciation
- Annual demand: Market demand of the product
- Setup cost: Total cost of each order, including shipping and handling fees
With these three factors in mind, businesses can use the following Economic Order Quantity formula:
EOQ = Square Root of [2 x Annual Demand x Setup Cost / Holding Cost]
By using the safety stock calculation alongside the economic order quantity formula, businesses can keep a balanced inventory and their desired service level at the same time. To help your business keep track of its inventory and financial needs, try using QuickBooks Online.
Using software that combines accounting tools and inventory tracking is a great way to keep your safety stock and reorder points in harmony. Join the millions of other users that have improved their businesses when you sign up for free today.