Ordering cost is what it costs you to place and receive one order, whatever's in it. The formula has two parts. Cost per order = the time it takes to order, receive, check and pay, at what that time costs, plus any delivery or order fee. Yearly ordering cost = orders a year × cost per order, where orders a year is yearly use divided by the order size. Order often in small amounts and the yearly ordering cost climbs; order rarely in large amounts and it falls, but you hold more stock, which has its own cost. The order size where the two balance is the economic order quantity. For a small food business the bigger saving is often somewhere else: putting several items on the same order, so one order's cost covers flour, sugar and butter at once. In the example below, a taro business works out what its weekly flour order costs.
The short version
- Cost per order = time to order, receive, check and pay × your hourly cost + delivery or order fees.
- Orders a year = yearly use ÷ order size.
- Yearly ordering cost = orders a year × cost per order.
- Bigger, rarer orders cut ordering cost but raise holding cost; EOQ balances the two.
- Shelf life and storage space limit how big an order can be.
- Combining items on one order spreads the cost of ordering across all of them.
- TaroStack's reorder list shows what's due in days of cover, with each supplier's lead time and minimum. More below.
What goes into the cost of one order
| Part | What to count |
|---|---|
| Checking stock and placing the order | Minutes, at your hourly cost |
| Receiving and checking the delivery | Minutes, at your hourly cost |
| Matching the invoice and paying | Minutes, at your hourly cost |
| Delivery fee or small-order charge | Dollars per order |
| Card or payment fees charged per transaction | Dollars per order |
Leave out the price of the goods: that's the same however you order. How much stock costs to hold is in inventory carrying cost, and the balance of the two in economic order quantity.
The formulas
| Formula | |
|---|---|
| Cost per order | (minutes ÷ 60) × hourly cost + fees per order |
| Orders a year | Yearly use ÷ order size |
| Yearly ordering cost | Orders a year × cost per order |
| Yearly holding cost | (Order size ÷ 2) × yearly cost to hold one unit |
| Economic order quantity | √(2 × yearly use × cost per order ÷ yearly holding cost per unit) |
An example: a weekly flour order
Windward Roots, the made-up taro business I use in these examples, uses 104 bags of bread flour a year, two a week, and orders them every week:
| Part | Minutes | Cost |
|---|---|---|
| Checking stock and ordering | 15 | $5.00 |
| Receiving and checking | 20 | $6.67 |
| Matching the invoice and paying | 10 | $3.33 |
| Delivery fee | $10.00 | |
| Cost per order | 45 | $25.00 |
At $20 an hour, the 45 minutes cost $15, and the delivery fee brings it to $25 an order. Ordering every week is 52 orders, $1,300 a year to buy $3,120 of flour. Holding a bag costs about $14 a year, so ordering 2 bags at a time costs only $14 a year to hold. The economic order quantity is about 19 bags: 5.5 orders a year, $137 of ordering cost and $133 of holding cost, $270 in all. The bakery can't store 19 bags, so it settled on 8 bags every four weeks on the same order as its sugar and salt: 13 orders, $325 a year, and the delivery fee now covers three items instead of one.
Get the calculator
Download the ordering cost calculator. Two sheets: the cost of one order, where you type the minutes for each step, your hourly cost and the fees; and the yearly view, where you type yearly use and the cost to hold one unit, and the yearly ordering, holding and total cost fill in for order sizes from 1 to 40, with the economic order quantity. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
The formula works one item at a time. Forty items from six suppliers, each with its own minimum, lead time and delivery day, turn the question into which items to put on which order this week. When each item is due is in reorder point example.
How TaroStack does it
TaroStack's reorder list shows what's due and who supplies it.
Reorders in days of cover. The reorder list shows each item in days of cover, with each supplier's lead time and minimum, so flour, sugar and salt can be ordered together when the first of them is due.
Purchase orders. A purchase order is drafted from the list, approved, and received against when it arrives, with its lots.
Reorder points from real use. Reorder points are suggested from how stock actually moves, and lead times are checked against how long deliveries really take.
| The job | Spreadsheet | In TaroStack |
|---|---|---|
| What's due this week | Checked item by item | Reorder list in days of cover |
| Which supplier has which items | Remembered | Each item's supplier, lead time and minimum |
| How long deliveries really take | The rep's promise | Lead times checked against reality |
| When to reorder | A number from years ago | Reorder points from real use |
Purchase orders and the reorder list are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.