Economic Order Quantity: Formula, Advantages, & Difficulties

[mstakh.i.mom.i]

EOQ or Economic Order Quantity is a critical calculation used by companies to minimise total costs when updating the inventory. The EOQ formula calculates the total cost of the inventory like the costs of holding, shortage, or order during the continuous review inventory system. In the EOQ model of inventory management when stock-in-hand reaches the ‘x’ level, ‘n’ units are reordered to maintain sustainability in order fullfilment.

Thus, EOQ is a powerful tool that helps businesses decide when to reorder, how much to order and how frequently to reorder, such that inventory management costs are at their lowest.

Here we explore how to use the EOQ formula with examples and understand the business implications and the challenges of optimising inventory management using EOQ equations.

Economic Order Quantity (EOQ)
Formula for EOQ
The EOQ formula is the ideal tool to determine stocking parameters such as egypt phone number list frequency of reordering, units to be reordered and time to order. The components of the formula and an analysis of it are discussed in detail here.

In the EOQ model, a theoretical approach is used for the purchase of an ideal quantity of goods. Several factors are taken into consideration for this calculation. Demand and inventory depletion are assumed to be constant and at fixed rates until they reach zero. The number of units that need to be ordered to return the inventory to its starting level is calculated when the stock reaches zero. The model also assumes immediate replenishment of stock and does not factor in inventory shortages or the costs associated with it.