Economic Order Quantity (EOQ) is a crucial inventory management tool designed to determine the optimal order size that minimizes total inventory costs, including ordering, holding, and shortage costs. It aids businesses in making informed decisions about inventory levels and order timings, thus preventing overstocking and understocking while ensuring sufficient stock availability. The EOQ formula balances ordering and holding costs, providing insights into order frequency and cash flow management.

1. Economic Order
Quantity (EOQ)

2.  Economic Order Quantity (EOQ) gives the perfect standard quantity a
company uses to calculate the inventory. It also helps minimize the total
costs of inventory such as the overall ordering costs, shortage costs, and
holding costs.
 EOQ is part of inventory management that ensures the inventory is
always monitored. It ensures that a company orders a fixed quantity
whenever the inventory attains a specific reorder point.
 Economic Order Quantity (EOC) is the quantity required to avoid
running out of stock. It limits the risk of understocking or overstocking of
products. The EOQ reduces stock and production issues.

3.  Economic Order Quantity also provides an ideal method of calculating the
appropriate reorder point and the optimal reorder quantity to prevent shortages in
inventory.
 This scheme was invented by Ford W. Harris in 1913 and has undergone
various reviews since then.
Assumption - The EOQ assumes
1- Demand is constant
2- Inventory is reduced at a fixed rate until it reaches zero.
EOQ ensures that a company witnesses no shortage of inventory with no additional cost.

4. Why Use EOQ?

5. 1. Decision Making
Economic Order Quantity is valuable to both small and big business owners. It
assists managers in taking decisions on the number of times they make orders on a
particular item, how often they reorder to get low possible costs and how much
inventory they have.
Economic Order Quantity shows business owners if current order quantities are
reasonable or not. It helps to indicate if an action should or should not be carried
out.
For example, a business owner becomes aware of the risk of over-stocking if he or
she decides to order a certain amount of new stocks at a particular time.

6. 2. Cost Reduction
Economic Order Quantity reduces the high cost of inventory storage. The
amount of money spent on inventory storage becomes lesser and more affordable.
3. Tracking Orders
Once you start using Economic Order Quantity, it makes keeping track of the
increment or decrement in the rate of ordering easier.
Proper use of EOQ assists in monitoring orders. It keeps the rate of order at a
normalized level that will be beneficial to the business. The renewal of the inventory
becomes faster, efficient, and accurate.

7. 4. Shows Availability of Stocks
Using EOQ helps the company stay ahead of demands and not run out of
stocks. Stocks are available in abundance and deadlines are easily met when you
use the Economic Order Quantity to perfection. This results in keeping long-term
customers and clients, and lower customer acquisition costs (CAC).
5. Easy Running of the Business
Businesses operate better when they are aware of their ideal Economic
Order Quantity. Economic Order Quantity helps a business time its orders for
inventory to avoid low stocks and dead stocks situations.

8. 5. How to Conduct Proper Planning
Economic Order Quantity helps in planning how much product to keep in stock
for the number of sales made. It prevents the need to spend more and the risk of
running low on stocks while demand persists. Companies use it for
demand forecasting.
6. How to Better Manage Your Company’s Cash Flow
The Economic Order Quantity (EOQ) is known as a cash flow tool that helps to
control cash that has been held down in a company's inventory balance. Minimizing
the level of inventory means more cash for other business investments.

9. Factors Determining EOQ

10. 1. Ordering Costs
Ordering costs refer to all the costs incurred each time an order is placed for inventory with the company. It is also referred to as setup costs.
Examples of ordering costs include delivery charges, telephone charges, payment processing expenses, invoice verification expenses, and others. It
also includes both handling and shipping costs.
The ordering costs answer the question “How much does an order cost per purchase?” It varies depending on the frequency of orders.
In most situations, if you increase the number of orders placed in a year, the total ordering costs will increase, and if you decrease the number of
orders placed in a year, the total ordering costs will also decrease.
2. Holding Costs
Holding cost is the total costs a company incurs to hold inventory in a warehouse or store. The total holding costs depend on the size of the
order placed for inventory. It is also referred to as carrying costs.
Minimizing the holding costs to the barest minimum is an important aspect of warehouse management. Companies use warehouse inventory
management software to help keep their holding costs low.
Examples of holding costs include insurance and property tax, rent, deterioration, maintenance fees, storage space, shrinkage, obsolescence, and
others.

11. Relationship Between Ordering and Holding Costs
The Economic Order Quantity (EOQ) is the point at which the sum of the ordering
and holding costs is at the minimum level.
Ordering cost is inversely proportional to holding cost if the annual demand
remains constant. As the number of orders increases, the ordering cost increases but
the holding cost decreases. Also, as the number of orders decreases, the ordering cost
decreases but the holding cost increases.

12. What the Economic Order Quantity Can Tell You

13. 1. How To Determine the Inventory Reorder Point
The Economic Order Quantity determines the inventory reorder point of a company. By doing so, the company continues
to fill orders and does not run out of inventory. Inventory shortage leads to loss of clients and customers. There is also revenue
lost if the company can not fill an order due to insufficient inventory.
2. How To Identify the Optimal Number of Products
Identifying the optimal number of products to order is the main purpose of the Economic Order Quantity (EOQ).
Ordering the optimal number of products needed helps the company to keep its costs low and prevent dead stocks. The
aim of calculating the Economic Order Quantity is to determine the number of inventory to be attached to each order at the
lowest possible costs.
The EOQ gives specific numbers pertaining to a business. It gives the best results concerning inventory which leads to better
and long-lasting patronage.
After identifying the optimal number of products, the company can minimize the costs of buying, delivering, and storing
products.

14. 3. How To Minimize Costs
Economic Order Quantity (EOQ) is the order size that minimizes the sum of ordering and holding costs related to raw
materials or merchandise inventories. Keeping costs low will inflate margins and ultimately drive more revenue
for the company.
The EOQ is designed to help companies or small businesses strategize to minimize their overall costs by learning the
trends of their production.
4. How to Find the Optimal Order Size
The Economic Order Quantity is used by manufacturing and merchandise companies. The merchandise
companies compute it to get the optimal order size of ready-to-use merchandise inventory while the manufacturing
companies compute it to find the optimal order size of raw materials inventory.

15. Components-
 Annual Usage- (in form of Quantity not in rupees)- 1600 pc
 Ordering Cost- ( single time order cost) – 100$
 Storage cost- ( Per unit per cost)- single unit cost- $8
 Price of one unit - $50
Total Material cost- 1600*50= 80000