What is the Economic Order Quantity | What is EOQ

The Economic Order Quantity (EOQ) is a key principle in inventory management and supply chain optimization.

It determines the ideal order size a company should procure to minimize overall inventory expenses, which encompass holding costs, ordering costs, and shortage costs.

📌 Related videos

▶ Buffer Stock vs Safety Stock

▶ 4 Types of Inventory

✍ Here is the transcript of the video

▶ Economic Order Quantity (EOQ)

is a fundamental concept in inventory management and supply chain optimization.

It represents the optimal order quantity a company should purchase for its inventory to minimize total inventory costs, which include holding costs, ordering costs, and shortage costs.

▶ The EOQ model

assumes that demand, ordering, and holding costs remain constant.

The model aims to determine the most cost-effective quantity to order that minimizes total inventory costs while satisfying customer demand.

The EOQ is the point where annual ordering costs and annual holding costs intersect, resulting in the lowest possible total cost.

▶ Ordering costs

are the expenses incurred to process and manage orders, while holding costs (also known as carrying costs) are the costs associated with storing inventory over a certain period.

These can include warehousing costs, insurance, spoilage, and obsolescence.

However, the EOQ model has its limitations.

It assumes constant demand, which is not always the case in real-world scenarios.

It also assumes immediate delivery of inventory, which may not always be possible.

Furthermore, it does not consider quantity discounts that suppliers often offer for larger orders.

▶ Conclusions

Despite these limitations, the EOQ model is a valuable tool for industrial engineers in managing inventory.

It provides a starting point for understanding the trade-offs between ordering and holding costs, and can guide decision-making in inventory management.

However, it should be used in conjunction with other inventory management strategies and tools to account for its assumptions and limitations.

ツ CONNECT WITH ME ツ

Hi,

my name is Mark Anderson a 20+ year Lean Expert.
I have created LeanVlog because I want to spread Lean Thinking worldwide and I think the video is the most effective way to teach, learn, and spread knowledge.

If you want to stay in touch with me you can choose the channel you prefer.

A) Linkedin

B) Latest Videos and Playlist

C) Telegram

#EconomicOrderQuantity #eoq