Economic Order Quantity. The assumptions that underpin the EOQ model.

Economic Order Quantity

To calculate the Economic Order Quantity (EOQ), a fundamental inventory management tool, the following information is required:

• Annual Demand (D):

  • The total quantity of units expected to be sold or used over a year.

• Ordering Cost per Order (S):

  • The fixed cost incurred each time an order is placed, regardless of the order size. This includes expenses such as order processing, shipping, and handling.

• Holding Cost per Unit per Year (H):

  • The cost to store one unit of inventory for a year, encompassing warehousing, insurance, depreciation, and opportunity costs.

The EOQ formula is expressed as:

The formula aims to minimize the total inventory costs by balancing ordering and holding expenses.

Key Assumptions Underpinning the EOQ Model:

1. Constant Demand:

   • The EOQ model assumes that demand for the product is steady and predictable throughout the year. This means there are no seasonal fluctuations or unexpected changes in customer demand.

2. Instantaneous Replenishment:

   • It is assumed that inventory orders are received immediately when stock reaches zero, implying no lead time. This ensures that there are no stockouts or delays between ordering and receiving inventory.

Understanding these assumptions is crucial, as deviations in real-world scenarios—such as variable demand or lead times—can impact the applicability and accuracy of the EOQ model.