Economic Order Quantity is the purchase order quantity for replenishment that minimizes inventory costs totale.s
Summary
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- 1 Objective
- 2 Main assumptions
- 3 Calculation formula
- 4 Source
objective
The Economic Order Quantity (EOQ) is intended to determine the purchase order quantity for replenishment that minimizes total inventory costs. The order is triggered when the inventory level reaches the reorder point. The EOQ is calculated to minimize a combination of costs, such as purchase cost (which may include volume discounts), inventory warehousing cost, order cost, etc. Order quantity optimization is complementary to safety stock optimization, which focuses on finding the optimal threshold to trigger the reorder.
Main assumptions
The main assumptions of the model are:
- Inventory receipt is constant over a period of time.
- Production and demand are known and constant.
- The lead time is known and constant.
- There are no quantity discounts, however, this condition is feasible to make flexible * like the Economic Order Quantity Model (EOQ) with quantity discounts.
- The only two relevant costs are the cost of maintaining inventory and the cost of placing an order.
- Out of stock (shortage) is avoided if the order is placed at the right time.
Calculation formula
Ctr = Cp + Cmi
Ctr = D x S / Q + H x Q / 2
Where
Cp = Order costs
Cmi = Annual inventory maintenance costs
Ctr: is the actual total cost
D: annual demand
S: Unit cost of the order
H: Annual inventory maintenance cost
Q is the optimal order quantity
