The Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes the total inventory costs, including ordering and holding costs. It helps businesses decide the most cost-effective quantity to order for inventory replenishment.

EOQ Formula:

$EOQ = \sqrt{\frac{2DS}{H}}$

Where:

• D = Demand for the product (units per period, e.g., per year)
• S = Ordering cost per order (fixed cost for placing an order)
• H = Holding or carrying cost per unit per period (cost to store a unit in inventory)

Step-by-Step Calculation:

1. Determine Demand (D): Estimate how many units you need to sell or use per year (annual demand).
2. Calculate Ordering Cost (S): Identify the cost to place a single order, including shipping, handling, and administrative costs.
3. Find Holding Cost (H): This is the cost of storing one unit of the product for a specific time period, including warehousing, insurance, and deterioration.
4. Plug into the EOQ Formula: Substitute the values of D, S, and H into the formula to compute the EOQ.

Example:

If a company sells 10,000 units per year (D = 10,000), the cost per order is $50 (S = 50), and the holding cost per unit is $2 per year (H = 2), the EOQ would be calculated as follows:

$EOQ = \sqrt{\frac{2 \times 10,000 \times 50}{2}} = \sqrt{500,000} = 707.1 \, \text{units}$

So, the optimal order quantity is approximately 707 units.

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Would you like to explore more about EOQ or how to apply it in different scenarios? Here are some related topics for further learning:

1. How does the EOQ model change with fluctuating demand?
2. What are the limitations of using the EOQ formula?
3. How does the EOQ model apply to service industries versus manufacturing industries?
4. How do you factor in safety stock into the EOQ calculation?
5. What is the relationship between EOQ and Just-in-Time (JIT) inventory management?

Tip: Always ensure that the assumptions behind the EOQ model (constant demand and fixed costs) hold true for your specific case, or adjust the model accordingly.