EOQ

• Economic Order Quantity (EOQ)


  A formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs, including ordering costs and holding costs
• EOQ formula


  𝑬𝑶𝑸 = √𝟐𝑫𝑺/𝑯
• Demand (D)


  The total demand for the product over a specific period, typically measured in units per time period
• Ordering cost (S)


  The cost associated with placing an order, including administrative costs, transportation costs, and any other expenses related to procurement
• Holding cost (H)


  The cost of holding or storing inventory, including storage space, insurance, obsolescence, and depreciation
• D = Demand rate (units per time period); Annual demand (units)
• S = Ordering cost per order; Cost per order
• H = Holding cost per unit per time period; (Holding cost) = I x C
• C = Cost per unit
• I = Holding cost (%)
• EOQ formula


  • Helps businesses determine the optimal order quantity that minimizes the total costs associated with holding inventory and placing orders
• EOQ


  It aims to strike a balance between the costs associated with holding inventory and the costs incurred from placing orders.
• Cost Efficiency


  minimizing total inventory costs by determining the optimal order quantity that balances holding costs and ordering costs.
• Optimized Inventory Levels


  
  

  businesses can ensure that they maintain optimal inventory levels to meet customer demand while avoiding excess inventory or stockouts.
• Simplified Ordering Process 


  straightforward formula for determining the optimal order quantity, streamlining the ordering process and reducing the need for complex inventory management decisions.
• Reduction in Holding Costs


  helps in minimizing holding costs by ensuring that inventory turnover is optimized, thereby reducing the amount of capital tied up in inventory.
• Assumptions


  relies on several assumptions, such as constant demand, fixed ordering and holding costs, and no quantity discounts. Deviations from these assumptions in real-world scenarios may impact the accuracy of the EOQ calculation.
• Complexity


  
  

  implementing it effectively may require additional considerations such as lead times, variability in demand, and storage constraints, which can add complexity to the inventory management process.
• Limited Applicability


  may not be suitable for all types of products or industries, particularly those with unpredictable demand patterns or perishable goods where holding costs are significant.
• Calculation Challenges


  Calculating accurate values for ordering costs, holding costs, and demand rate can be challenging, especially when dealing with variable or uncertain factors.