Overview
Economic order quantity (EOQ) is an operational metric used to determine the volume and frequency of orders a company should take on to satisfy a given level of demand while incurring the minimal cost per order. While the cost of ordering an inventory decreases with the increase in order volume due to economies of scale, the cost of holding the inventory rises with the size of inventory. EOQ is then determined to minimize the two inversely related costs. The EOQ formula comprises several components:
  • Annual Ordering Cost = Annual Quantity Demanded (D) / Volume per Order (Q) x Ordering Cost (S)
  • Annual Holding Cost = Volume per Order (Q) / 2 x Carrying Cost (i) x Holding Cost (H)
  • Annual Total Cost (TC) = Annual Ordering Cost + Annual Holding Cost - EOQ = dTC / dQ = √ (2SD/H)
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