What is an Economic Order Quantity (EOQ)?
The economic order quantity (EOQ) is a method used to determine the optimum order quantity for an item of stock that minimises ordering and carrying costs.
There are several ways to calculate the Economic order quantities but a basic formula is as follows: √ 2DS/CI,
- Where D is annual anticipated demand
- S is the order cost per order
- C is the cost of the item
- I is an annual carrying cost interest rate
There are however varying models that can be applied. You can find out further information on the calculation method by reading the full knowledge paper.
How Would I Apply an Economic Order Quantity Formula to My Role?
The strategy is also dependent on a size of a company: small businesses often face financial and logistical limitations when erecting their inventory systems. In addition, inventory needs differ across industries and sectors, for example, consumer goods producers require well-balanced inventories at the point of sale, clients of industrial and commercial producers usually do not require the same degree of delivery lead time, so ensuring that you chose the most effective method for your organisation is important.
What Would I Need to Prepare Before Applying the Method?
If companies face the need to establish or restructure the inventory control system, it is advisable to perform 'inventory segmenting' or 'inventory partitioning'. This practice requires a breakdown and review of total inventory by classification, inventory stages (raw materials intermediate inventories, finished products), sales and operations groupings and excess inventories.
What Are Some Advantages of Applying an EOQ?
- EOQs are often appropriate for repetitive purchasing scenarios.
- EOQs may be suitable for determining which items fit into a just-in-time (JIT) model and what level is economically beneficial for the company.
- The EOQ method demonstrates a commitment to ordering in a stable manner from suppliers which minimises risk of stock-outs.
To find out more about this subject read the full knowledge paper: Economic Order Quantity EOQ
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