Economic order quantity
Economic order quantity (EOQ) is the ideal order quantity a company should purchase for its inventory given a set cost of production, a certain demand rate, and other variables. This is done to minimize inventory holding costs and order-related costs.
The Following excerpt is taken from How to make EOQ Relevant Again (Links to an external site.) (2012).
y-axis is cost. x-axis is order quantity. EOQ is in the middle where inventory carrying costs and acquisition cost per order meet
EOQ will increase as the annual demand and the cost of ordering increase and it will decrease as the cost of carrying inventory and the
The concepts of Just-in-Time (JIT) and Lean have led many to question the continued relevance of Economic Order Quantity (EOQ), whose function is to identify the optimum order with the lowest cost parameter.
In response, yes, it is still valid as a basic analytic tool, however, many supply chain industry executives perceive it as irrelevant. Many companies cannot apply it—even if they wanted to—because they do not know their acquisition costs to place an order or their yearly inventory carrying cost rate.
EOQ is used despite its highly restrictive assumptions that: demand is relatively constant and is known or predictable; the item is purchased in lots or batches and not continuously; the order and preparation costs (acquisition or purchase cost per order) and the inventory carrying costs are constant and known; and replacement of inventory occurs all at once. And knowing how to apply EOQ practically is just as important as being able to use the formula calculation itself.
In your initial post, defend your position on batch size and tell whether Economic Order Quantity (EOQ) is relevant to your selected company/industry.
Identify how metrics are used in the company/industry to support use of batch size or EOQ.
- Enter your company’s story along with narrative and relevant metrics in the initial post of the Discussion Forum.