How much goods to order?

Most traders order intuitively, which is perfectly fine when dealing with small quantities of goods. When sales rises, in order to be efficiently ordered, insight in inventory costs is needed. These costs are divided into three groups: costs of acquisition, holding and lack of inventory (missed income due to lack of inventory). An economically justified order quantity is the one that causes the lowest inventory costs.

The economic order quantity is the quantity of goods ordered which minimizes the costs of obtaining and holding inventories. It is calculated as the square root of the quotient of the double product of the estimated order and the cost of ordering with the product of the unit price and the percentage share of the cost of keeping the inventory at cost.

In the following example, we have created a table with several articles (types of wine) as well as columns containing the purchase price of the item per unit of measure, estimated size of the order (expected turnover), procurement costs per order and estimated inventory costs as a percentage of the purchase price values. In the last column we enter the formula:

=INT(SQRT((2*C3*D3)/(E3*B3)))

Using the INT function we round the calculated economic size of the order to the first lower value. The quantities obtained in this way can be added to the procurement plan, and later used when ordering goods.