But, it cannot be adopted as the one-stop solution for total inventory management. Thus, EOQ can be an effective tool in inventory management to find the optimum quantity to be ordered. “ Lead Time in days * Average Daily Usage”.

So ordering level for the material is generally defined as : However, procurement of material needs some time. This model assumes that material may be needed instantly. Though EOQ may estimate how much inventory should be ordered, it does not give an answer to when should it be ordered.

It is assumed that the consumption or usage throughout the year will be constant which would not true because it would change season to season.

Carrying cost is determined on the basis of estimation that may vary over the time.

It is assume that all costs are known and constant (ordering cost, unit cost etc) which is not correct.

There is some problems exists for determining the EOQ which are enumerated as follow:

Formula of EOQ:ĮOQ can be calculated with the help of the mathematical formula:Ĭ = Carrying cost per unit Limitations of EOQ: Order Costs: Order costs includes communication costs, transportation costs, insurance on transit costs, inspection costs, etc. For example, if an entity sold 100 units over one month, their projected sales would be 1,200 units in a year. Storage Cost per unit: Storage cost includes space costs, rent of the store, electricity, software, depreciation, warehouse personnel, etc.Īnnual Usage: Annual usage simply means how much of a product an entity expecting to sell in one year. The following factors influence the Economic Order Quantity: Hence, it is important to make a balance between ordering costs and carrying costs in order to find a favorable quantity. Thus, Ordering cost decreases as the size of purchase increases because in that case, the number of purchases decreases, but the carrying cost increases with the increase in the size of purchase. Ordering cost is independent of the quantity ordered, while carrying cost (which includes storage costs, handling costs, upkeep expenses, insurance charges, cost of obsolescence, etc. warehouse rent, insurance, spoilage costs, etc. On the other hand, carrying costs is the inventory holding costs that may include opportunity costs of money held up in inventories, storage costs i.e. Ordering costs include communication costs, transportation costs, insurance on transit costs, inspection costs, etc. Ordering costs are the costs that are incurred at the time of placing an order and receiving the new shipment of inventories. Inventory management costs are ordering costs and carrying costs. In such a system, every time inventory levels fall to the minimum level / re-order point, an order is placed for the economic order quantity. However, many people use “EOQ” to refer to a min/max inventory system. Detail discussion:ĮOQ (Economic Order Quantity) is considered an efficient order quantity but the average inventory on hand over time cannot be calculated from EOQ alone. To minimize holding costs, shortage costs, and ordering costs, a company should use the economic order quantity rule.

It indicates to confirm whether, or not the current order quantities are reasonable. EOQ is the order quantity that minimizes total holding and ordering costs for the year.

The Economic Order Quantity is also known as Optimal Order Quantity.

Economix order quantity