Annual holding cost
Annual holding cost = (Q / 2) x H
Whenever stock runs down evenly from Q to zero. Q/2 is the average inventory over the cycle.
- Q
- Order quantity in units
- H
- Holding cost per unit per year; convert from a percentage of price first
Annual ordering cost
Annual ordering cost = (D / Q) x S
D/Q is the number of orders placed a year. Ordering cost never depends on how big each order is.
- D
- Annual demand in units
- S
- Ordering cost per order, or setup cost per run
Holding cost from a percentage
H = carrying charge % x unit price
The first line of almost every inventory numerical. Do it before touching Q.
- carrying charge %
- Annual carrying cost as a fraction of inventory value, e.g. 0.09
- unit price
- Cost of one unit