Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal quantity of inventory to order at any given time. The goal of EOQ is to minimize the total costs associated with ordering and holding inventory.
The formula takes into account several factors, including the cost of placing an order, the cost of holding inventory, and the demand for the product. The formula is:
EOQ = √((2DS)/H)
Where:
- D = Annual demand
- S = Cost of placing an order
- H = Cost of holding one unit of inventory for a year
The result of the EOQ formula gives the optimal order quantity that minimizes the total cost of ordering and holding inventory. By using the EOQ formula, businesses can ensure that they are not overstocking, which can lead to higher holding costs, or understocking, which can lead to stockouts and lost sales.
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