Economic Order Quantity (EOQ)
EOQ is the optimal order quantity that minimizes total inventory costs, including holding costs and order costs. It helps determine the most efficient inventory replenishment quantity.
Economic Order Quantity (EOQ)
Introduction: Economic Order Quantity (EOQ) is a mathematical model used in inventory management to determine the optimal order size that minimizes the total cost of inventory. This includes costs related to ordering, holding, and shortages. By calculating the EOQ, businesses can achieve a balance between these competing costs, leading to increased efficiency, reduced waste, and improved cash flow. The EOQ formula is a cornerstone of operations management and supply chain optimization, especially for businesses looking to streamline operations and reduce inventory costs in competitive markets.
Where:
- D = Demand rate (units per period)
- S = Order cost (per order)
- H = Holding cost (per unit, per period)
Benefits of Implementing EOQ:
- Inventory Cost Reduction: Minimizes the sum of ordering and holding costs.
- Improved Cash Flow: Reduces money tied up in inventory, freeing up resources for other areas of the business.
- Optimized Ordering Processes: Streamlines ordering and inventory management, reducing the time and effort required to manage stock levels.
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