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Economic Order Quantity (EOQ): Definition & Formula

Economic order quantity (EOQ) is the ideal order quantity that minimizes total holding and ordering costs.

Why is economic order quantity (EOQ) important?

EOQ is important because it helps businesses optimize their inventory levels, minimize costs, and ensure they have sufficient stock to meet customer demand.

An easy way to understand economic order quantity (EOQ) is:

Think of it as the ideal amount of inventory a company should order to minimize costs. It balances the cost of holding inventory with the cost of placing orders.

Formula of Economic Order Quantity (EOQ)

EOQ = √(2DS / H)

Where:

D = Annual demand in units

S = Order cost per order

H = Holding cost per unit per year

To calculate EOQ, use the formula above, which takes into account annual demand, order cost, and holding cost. This formula helps businesses determine the optimal order quantity to minimize total inventory costs.

By calculating the Economic Order Quantity (EOQ), we optimized our inventory management, minimizing both holding and ordering costs. This efficiency not only reduced unnecessary expenditure but also ensured we had the right amount of supplies on hand, leading to smoother operations and higher client satisfaction.

Frequently Asked Questions

What is the economic order quantity formula?

How does EOQ help in inventory management?

What assumptions does the EOQ model make?

How can changes in demand affect EOQ?

Can EOQ be used for all types of inventory?

What are the limitations of the EOQ model?

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