What is Economic Order Quantity ?

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Economic order quantity (EOQ) is the ideal quantity of units a company should purchase to meet demand while minimizing inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has been refined over time. The economic order quantity formula assumes that demand, ordering, and holding costs all remain constant.

Definition

Economic Order Quantity (EOQ) refers to the ideal quantity of units a company should purchase to meet demand while minimizing inventory costs, such as holding costs, shortage costs, and ordering costs. EOQ helps businesses find a balance in inventory management to reduce total costs.

Origin

The EOQ model was first developed by Ford W. Harris in 1913. Although the initial model was relatively simple, the EOQ formula has been refined over time to adapt to different business environments and needs.

Categories and Features

EOQ is primarily used in inventory management, applicable when demand, ordering, and holding costs remain constant. Its features include: 1. Demand is known and constant; 2. Each order's lead time is fixed; 3. Holding and ordering costs are known and constant. The advantage of EOQ is that it helps businesses reduce total inventory-related costs, but its assumptions may not fully hold in real-world applications.

Case Studies

Case 1: A retail company used the EOQ model to determine its optimal order quantity of 500 units, reducing its inventory holding costs by 15%. Case 2: A manufacturing firm optimized its raw material procurement process using EOQ, cutting ordering costs by 20%.

Common Issues

Common issues include: 1. EOQ assumes constant demand and costs, which may fluctuate in reality; 2. EOQ does not account for bulk discounts or other market factors. Investors should adjust the application of the EOQ model based on actual conditions.

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