How To Calculate Total Annual Inventory Cost

Total Annual Inventory Cost Equation:

\[ TAIC = (Avg Inv \times H Cost) + \left(\frac{Demand}{Q}\right) \times Order Cost \]

Average Inventory (Avg Inv):

units

Holding Cost (H Cost):

currency/unit/year

Annual Demand (Demand):

units/year

Order Quantity (Q):

units

Order Cost:

currency/order

Total Annual Inventory Cost (TAIC):

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1. What Is Total Annual Inventory Cost?

Total Annual Inventory Cost (TAIC) represents the sum of all costs associated with maintaining and ordering inventory over a one-year period. It combines holding costs and ordering costs to help businesses optimize their inventory management strategies.

2. How Does The Calculator Work?

The calculator uses the EOQ model equation:

\[ TAIC = (Avg Inv \times H Cost) + \left(\frac{Demand}{Q}\right) \times Order Cost \]

Where:

\( TAIC \) — Total Annual Inventory Cost (currency/year)
\( Avg Inv \) — Average Inventory (units)
\( H Cost \) — Holding Cost (currency/unit/year)
\( Demand \) — Annual Demand (units/year)
\( Q \) — Order Quantity (units)
\( Order Cost \) — Cost per Order (currency/order)

Explanation: The equation balances the trade-off between holding costs (storage, insurance, opportunity cost) and ordering costs (processing, shipping, setup).

3. Importance Of Inventory Cost Calculation

Details: Calculating total inventory costs helps businesses minimize expenses, optimize order quantities, improve cash flow, and enhance overall supply chain efficiency.

4. Using The Calculator

Tips: Enter average inventory in units, holding cost per unit per year, annual demand in units, order quantity in units, and cost per order. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the Economic Order Quantity (EOQ)?
A: EOQ is the optimal order quantity that minimizes total inventory costs, calculated as \( EOQ = \sqrt{\frac{2 \times Demand \times Order Cost}{Holding Cost}} \).

Q2: What costs are included in holding costs?
A: Holding costs include storage fees, insurance, taxes, obsolescence, shrinkage, and opportunity cost of capital tied up in inventory.

Q3: What costs are included in ordering costs?
A: Ordering costs include purchase order processing, shipping, receiving, inspection, and setup costs for production orders.

Q4: How does order quantity affect total costs?
A: Larger order quantities reduce ordering costs but increase holding costs, while smaller quantities have the opposite effect.

Q5: When is the EOQ model most applicable?
A: The model works best when demand is constant, ordering and holding costs are known and stable, and lead time is consistent.