EOQformule

The EOQ formula, or Economic Order Quantity formula, is a mathematical model used in inventory management to determine the optimal quantity of an item to order at one time to minimize total inventory costs. These costs typically include ordering costs, which are incurred each time an order is placed, and holding costs, which are associated with storing inventory. The goal of the EOQ model is to find the order quantity that strikes a balance between these two opposing cost factors.

The basic EOQ formula is derived from a set of assumptions, including constant demand, constant ordering costs, and constant holding costs. It is represented as EOQ = sqrt((2DS)/H), where D is the annual demand for the item, S is the cost per order, and H is the annual holding cost per unit. By calculating the EOQ, businesses can establish a reorder point and quantity that helps reduce overall inventory expenditures, prevent stockouts, and improve efficiency in their supply chain. While the basic formula is straightforward, various extensions and adjustments exist to account for more complex scenarios, such as quantity discounts or variable demand.