What is EOQ (Economic Order Quantity) In Inventory?

Since the EOQ formula was developed in 1904 a number of variations and abbreviations have evolved. The idea takes into account the costs associated with placing, processing and paying for an order. The goal is to find the sweet spot between the reordering cost (R cost) and the carrying cost (K cost), a point referred to as the lowest total cost of inventory. Carrying costs refer to all the costs associated with stocking the inventory: the costs of warehouse space, of moving the inventory within the warehouse, of the opportunity cost of the money used to purchase the inventory, of insurance and taxes, of taking inventory and of inventory shrinkage. For inventory held for one year carrying costs are usually twenty-five to thirty-five percent. On the one hand, the more stock ordered per line item, the lower the reordering costs per item. On the other hand, the less stock ordered per line item, the lower the carrying cost per item. In use EOQ calculations insure inventory making up a small portion of sales will not get too much attention but be ordered infrequently in large quantities. Inventory making up a large portion of sales will be managed tightly and ordered frequently in small quantities.

formula was developed in 1904 a number of variations and abbreviations have evolved. The idea takes into account the costs associated with placing, processing and paying for an order. The goal is to find the sweet spot between the reordering cost (R cost) and the carrying cost (K cost), a point referred to as the lowest total cost of inventory. Carrying costs refer to all the costs associated with stocking the inventory: the costs of warehouse space, of moving the inventory within the warehouse, of the opportunity cost of the money used to purchase the inventory, of insurance and taxes, of taking inventory and of inventory shrinkage. For inventory held for one year carrying costs are usually twenty-five to thirty-five percent. On the one hand, the more stock ordered per line item, the lower the reordering costs per item. On the other hand, the less stock ordered per line item, the lower the carrying cost per item. In use EOQ calculations insure inventory making up a small portion of sales will not get too much attention but be ordered infrequently in large quantities. Inventory making up a large portion of sales will be managed tightly and ordered frequently in small quantities.

These techniques helps to manage inventory in the most effective way. Following the correct inventory management techniques will help you save money and help you complete your task fast.

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