The Economic order quantity or EOQ is the ideal, or most “economic” quantity of units that should be purchased or ordered, to meet demand while simultaneously attempting to minimize the costs of carrying inventory, ordering inventory and stocking out of inventory.
The EOQ model is that of a fixed order model. In other words the formula can be used to establish a quantity that will give a person guidance pertaining to how much of any one item they should buy or manufacture. Its purpose is so that companies can minimize the costs of acquiring and carrying inventory while still balancing the needs of demand.
When using the EOQ model there are a few assumptions that you must build your model with in mind:
That's a lot of information in a very short section, so let's look at some key takeaways before moving on to more. When answering the question, what is EOQ? You can say, The economic order quantity (EOQ) is a company's optimal order quantity that meets demand while minimizing its total costs related to ordering, holding, and stocking out of inventory. Next, when should we consider The EOQ formula? EOQ is best applied in situations where demand, ordering, and holding costs are relatively constant with very little peaks and valleys over time.
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