What is EOQ (Economic Order Quantity)?
EOQ is a quantitative model that calculates the optimal order quantity a business should purchase for its inventory with the objective of minimizing total costs related to ordering, receiving, and holding inventory. This formula considers factors like demand rate, ordering costs, and holding costs.
What is the importance of determining Economic Order Quantity for businesses?
Determining the EOQ is crucial for businesses as it helps in balancing the trade-off between inventory holding costs and ordering costs. By calculating the ideal order size, businesses can reduce excess inventory and associated holding costs while also minimizing frequent ordering costs. This optimization leads to improved cash flow management and operational efficiency.
What is the importance of Economic Order Quantity in inventory management?
In inventory management, EOQ plays a vital role by providing a systematic approach to determine the most cost-effective quantity of stock to order and hold. This aids in maintaining sufficient inventory levels to meet customer demand without incurring unnecessary costs. Efficient EOQ calculation contributes to reduced storage space requirements, minimize stock outs or overstock situations, and overall better inventory turnover.