The Economic Order Quantity (EOQ) is a formula used to determine the optimal quantity of inventory to order at one time, considering factors such as the cost of order placement, the cost of carrying inventory, and the cost of stockouts.

Formula:

EOQ = sqrt(2DS / H)

where:

• EOQ is the economic order quantity
• D is the daily demand
• S is the cost of placing an order
• H is the cost of carrying inventory per unit

Explanation:

• The formula calculates the square root of the ratio of twice the daily demand (D) times the cost of placing an order (S) to the cost of carrying inventory (H).
• The EOQ is the quantity that minimizes the total cost of inventory management, which includes the cost of order placement, the cost of carrying inventory, and the cost of stockouts.
• The EOQ is a variable that is used in inventory management to determine the optimal order quantity for a given set of circumstances.

Advantages:

• Optimizes inventory levels, reducing carrying costs and stockouts.
• Reduces order placement costs.
• Increases inventory turnover.

Disadvantages:

• Can be complex to calculate, especially for small quantities.
• May not be suitable for items with fluctuating demand or high order costs.
• Can lead to stockouts if demand exceeds the EOQ.

Example:

For a company that sells 100 units per day, has an order placement cost of $50, and carries inventory costs of $10 per unit, the EOQ would be:

EOQ = sqrt(2(100) * 50 / 10) = 10 units

Therefore, the optimal order quantity is 10 units.

Note:

The EOQ formula is an approximation and should be used as a guide, not as an exact solution. Factors such as lead time, product perishability, and demand variability can also affect the EOQ.