# Economic Order Quantity (EOQ)

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## Definition of 'Economic Order Quantity (EOQ)'

The economic order quantity (EOQ) is the optimal quantity of inventory to order at a time. It is the quantity that minimizes the total cost of ordering and holding inventory.

The total cost of ordering and holding inventory is made up of two components:

* The cost of ordering inventory

* The cost of holding inventory

The cost of ordering inventory is the cost of placing an order, which includes the cost of the materials, labor, and transportation. The cost of holding inventory is the cost of storing the inventory, which includes the cost of the warehouse space, the cost of insurance, and the cost of obsolescence.

The EOQ is the quantity that minimizes the total cost of ordering and holding inventory. It is the quantity that strikes the right balance between the cost of ordering inventory and the cost of holding inventory.

To calculate the EOQ, you need to know the following information:

* The annual demand for the item

* The cost of ordering inventory

* The cost of holding inventory

Once you have this information, you can use the following formula to calculate the EOQ:

```

EOQ = v(2*D*S)/H

```

where:

* EOQ is the economic order quantity

* D is the annual demand for the item

* S is the cost of ordering inventory

* H is the cost of holding inventory

The EOQ is a useful tool for businesses to manage their inventory levels. By ordering the EOQ, businesses can minimize their total cost of ordering and holding inventory.

Here are some additional considerations when using the EOQ:

* The EOQ is based on the assumption that demand is constant and that the lead time for delivery is constant. If either of these assumptions is not true, the EOQ may not be accurate.

* The EOQ is a static model. It does not take into account changes in demand or lead time. Businesses may need to adjust the EOQ as conditions change.

* The EOQ is a single-item model. It does not take into account the interactions between different items in the inventory. Businesses may need to use a more complex model to optimize their inventory levels.

The EOQ is a valuable tool for businesses to manage their inventory levels. However, it is important to understand the limitations of the EOQ before using it.

The total cost of ordering and holding inventory is made up of two components:

* The cost of ordering inventory

* The cost of holding inventory

The cost of ordering inventory is the cost of placing an order, which includes the cost of the materials, labor, and transportation. The cost of holding inventory is the cost of storing the inventory, which includes the cost of the warehouse space, the cost of insurance, and the cost of obsolescence.

The EOQ is the quantity that minimizes the total cost of ordering and holding inventory. It is the quantity that strikes the right balance between the cost of ordering inventory and the cost of holding inventory.

To calculate the EOQ, you need to know the following information:

* The annual demand for the item

* The cost of ordering inventory

* The cost of holding inventory

Once you have this information, you can use the following formula to calculate the EOQ:

```

EOQ = v(2*D*S)/H

```

where:

* EOQ is the economic order quantity

* D is the annual demand for the item

* S is the cost of ordering inventory

* H is the cost of holding inventory

The EOQ is a useful tool for businesses to manage their inventory levels. By ordering the EOQ, businesses can minimize their total cost of ordering and holding inventory.

Here are some additional considerations when using the EOQ:

* The EOQ is based on the assumption that demand is constant and that the lead time for delivery is constant. If either of these assumptions is not true, the EOQ may not be accurate.

* The EOQ is a static model. It does not take into account changes in demand or lead time. Businesses may need to adjust the EOQ as conditions change.

* The EOQ is a single-item model. It does not take into account the interactions between different items in the inventory. Businesses may need to use a more complex model to optimize their inventory levels.

The EOQ is a valuable tool for businesses to manage their inventory levels. However, it is important to understand the limitations of the EOQ before using it.

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Copyright © 2004-2023, MyPivots. All rights reserved.