A purchase decision has two separate parts: how many units to buy and when to place the order. Economic order quantity (EOQ) estimates the first under a basic cost model. Reorder point estimates the second from demand during replenishment and a buffer. Using one number for both can lead to purchasing too much stock or ordering too late.
Two calculations, different decisions
| Question | Calculation | Main inputs |
|---|---|---|
| How many units per order? | EOQ = √(2DS ÷ H) | Annual demand D, cost per order S, annual holding cost per unit H |
| When should replenishment start? | Reorder point = daily demand × lead time + safety stock | Demand in units per day, lead time in matching days, buffer in units |
Start with the EOQ calculator for order size and the reorder point calculator for timing. Both are planning estimates; neither places orders, forecasts demand or tracks your stock.
Worked EOQ example: 10,000 units a year
Suppose annual demand D is 10,000 units, placing one order costs S = 50, and holding one unit for one year costs H = 2. Use one consistent currency for S and H. The current calculator displays monetary results in INR (₹); it does not convert exchange rates.
EOQ = √(2 × 10,000 × 50 ÷ 2) = √500,000 ≈ 707.11 units.
The model suggests about 707 units per order. Before rounding, that means 10,000 ÷ 707.11 ≈ 14.14 orders a year. Annual ordering cost is about 14.14 × 50 = 707.11. Average cycle stock is about 707.11 ÷ 2 = 353.55 units, so annual holding cost is also about 707.11. Combined ordering and cycle-stock holding cost is approximately 1,414.21 per year.
The tool rounds its displayed quantities and costs to whole numbers. Its interval uses a 365-day year, giving about 26 calendar days between orders for this example. The combined cost excludes product purchase cost, shortages and the additional holding cost of a safety-stock buffer.
If you know a carrying percentage
Convert the percentage before entering H. For a unit costing 20 and an annual carrying rate of 10%, annual holding cost is 20 × 0.10 = 2. Enter 2, not 10. Decide which storage, insurance, financing and obsolescence costs belong in your estimate and avoid counting them twice.
Check supplier packs before purchasing
A supplier may sell only in packs of 50, so 707 units may be unavailable. Compare feasible nearby quantities with annual relevant cost C(Q) = (D ÷ Q) × S + (Q ÷ 2) × H. With these inputs, Q = 700 costs about 1,414.29 per year; Q = 750 costs about 1,416.67. The modeled difference is small. Minimum orders, freight breaks, storage and available cash may matter more than the theoretical optimum. This comparison is a manual planning step; the calculator does not choose a supplier pack size.
Worked reorder-point example: a 900-unit trigger
Consider average demand of 50 units per day, lead time of 14 days and a manual safety-stock buffer of 200 units. Expected demand during replenishment is 50 × 14 = 700 units.
Reorder point = 700 + 200 = 900 units. The result means to review replenishment when the relevant stock balance reaches the trigger under your policy. It does not mean the next order should contain 900 units.
If you use the calculator's maximum-usage method instead, it estimates safety stock as max(0, maximum daily usage × maximum lead time − average daily usage × average lead time). This uses your chosen maxima; it does not guarantee protection against all future stockouts or calculate a service-level probability.
Do not mix annual and daily demand silently
The two examples above illustrate separate calculations. They are not automatically one consistent policy. Demand of 50 units on every calendar day implies 18,250 units over 365 days, not 10,000. Demand of 50 units on 200 operating days implies 10,000 units per year, but then the meaning of the 14-day lead time must be checked.
If demand occurs only on operating days, estimate how many demand-bearing days fall within the supplier's lead time. Do not multiply an operating-day rate by calendar days without adjustment. For the 10,000-unit annual example, an evenly distributed calendar-day rate would instead be about 27.40. Over 14 calendar days, expected demand would be about 383.56 units; adding the same 200-unit buffer gives about 583.56, displayed as 584 units.
Similarly, the EOQ tool's 365-day interval is not an operating-day schedule. At 200 operating days per year, the underlying 14.14 annual orders imply about 14.14 operating days between orders, even though the tool shows about 26 calendar days. Choose a time basis that matches how stock is consumed and delivered.
Check orders already on the way
In a continuous-review policy, the trigger is commonly compared with inventory position = on-hand stock + stock on order − backorders. For example, 600 units on hand plus 400 already ordered minus 50 backordered gives an inventory position of 950. Comparing only the 600 units on hand with a 900-unit trigger could prompt a duplicate order. Check arrival dates and commitments as well; the calculator does not monitor these balances.
If stock is reviewed only once a week or month, demand until the next review also matters. A simple continuous-review trigger should not be treated as a complete periodic-review policy.
Turn the estimates into a reviewable policy
- Record the item, demand period, day basis and source of each cost estimate.
- Calculate a candidate order size, then compare feasible pack sizes and supplier terms.
- Choose lead-time demand and a justified buffer separately.
- Check existing orders, backorders, capacity and cash before placing a purchase order.
- Revisit the assumptions when demand, prices or delivery performance change.
Use the inventory turnover calculator as a separate annual review of cost of goods sold relative to average inventory. Turnover can help identify a change worth investigating, but it does not prove that a chosen EOQ or buffer prevents shortages.
Method and scope
These examples were calculated from the formulas shown above and checked against the current tools. The basic EOQ model assumes steady demand, fixed costs and replenishment without shortages. Safety-stock needs require a separate assessment of uncertainty. For background on inventory costs, see OpenStax's inventory-management chapter.