Economic Order Quantity (EOQ) An Economic Order Quantity (EOQ) is the optimal quantity of a product that a company should order from a supplier at one ti...
An Economic Order Quantity (EOQ) is the optimal quantity of a product that a company should order from a supplier at one time to minimize the total cost of ordering and holding inventory.
Key Points:
The EOQ is calculated based on the average cost of ordering, holding, and producing the product.
The ideal EOQ is the value that equates the average cost of ordering and holding inventory to the average cost of producing the product.
The EOQ can be used to optimize inventory levels and reduce holding costs.
The EOQ is a complex concept that takes into account many factors, including lead time, inventory carrying costs, and supplier discounts.
Different methods exist for determining the EOQ, each with its own strengths and weaknesses.
Example:
Imagine a company that sells a product with an average cost of 9 per unit, resulting in a total order cost of 15 per unit per year and the lead time is 2 weeks, the EOQ would be calculated as follows:
EOQ = (50 units/order) / (12 weeks/year) = 4.17 orders per year
This means that the company should order 4.17 orders of the product per year to minimize the total cost of ordering and holding inventory