The economic order quantity is the number of units that a company should add to inventory with each order to minimize the total costs of inventory such as holding costs and shortage costs. The EOQ is used as part of a continuous review inventory system in which the level of inventory is monitored at all times and a fixed quantity is ordered each time the inventory level reaches a specific reorder point.
1 Like
EOQ is an effective management tool where massive turn over of raw materials or SKD units are used by a Manufacturing company. Even if the Company is a mere intermediary providing retail mail order service, EOQ can minimise cost of holding inventory, cost of re-ordering etc. One of the-firms in India practising EOQ in manufacturing and Assembly production of Cars is Maruti Udyog,
formula is
EOQ((2 x AR x Co)/(UP x Ch))
AR ~ Annual Requirement
Co~ Cost of Ordering
UP ~ Unit Price
Ch ~ Carrying Cost