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Economic Order Quantity
EOQ
Difference between revisions of "EOQ"
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{{this}} or Economic Order Quantity Optimization is a [[:Category:Term|Term]] describing the calculation of the optimal ordering quantity for replenishment orders and the [[:Category:Practice|Practice]] to optimize ordering quantities. The {{this}} model balances inventory costs with ordering costs. | {{this}} or Economic Order Quantity Optimization is a [[:Category:Term|Term]] describing the calculation of the optimal ordering quantity for replenishment orders and the [[:Category:Practice|Practice]] to optimize ordering quantities. The {{this}} model balances inventory costs with ordering costs. | ||
| + | ===Use Cases=== | ||
| + | * Determining reordering quantities for production materials | ||
| + | * In [[Retail]]: Determining optimal ordering quantities | ||
===Calculation=== | ===Calculation=== | ||
{{math|{{this}}|{{sqrt|{{frac|2 × D × C{{sub|o}}|C{{sub|h}}}}|3}}}} | {{math|{{this}}|{{sqrt|{{frac|2 × D × C{{sub|o}}|C{{sub|h}}}}|3}}}} | ||
where | where | ||
| − | * D = Annual demand | + | * D = Annual demand (in UoM) |
| − | * C{{sub|o}} = Ordering costs per order | + | * C{{sub|o}} = Ordering costs per order (in Currency) |
| − | * C{{sub|h}} = Annual inventory holding cost | + | * C{{sub|h}} = Annual inventory holding cost (in Currency) |
Alternative names for {{this}} include: Optimal Order Quantity. | Alternative names for {{this}} include: Optimal Order Quantity. | ||
===Notes=== | ===Notes=== | ||
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* The model assumes the cost of ordering is a flat fee. Most use cases show substantially higher cost per order for small quantities. | * The model assumes the cost of ordering is a flat fee. Most use cases show substantially higher cost per order for small quantities. | ||
* The model assumes the cost of ordering (C{{sub|o}}) is a substantial cost element. With modern ordering methods these cost are no longer substantial; making the {{this}} calculation less relevant. Consider replacing Ordering costs per order with order volume discount. | * The model assumes the cost of ordering (C{{sub|o}}) is a substantial cost element. With modern ordering methods these cost are no longer substantial; making the {{this}} calculation less relevant. Consider replacing Ordering costs per order with order volume discount. | ||
| + | |||
| + | Use with care: {{OR}} recognizes this as an outdated [[Practice]]. | ||
{{object | {{object | ||
|name=Economic Order Quantity | |name=Economic Order Quantity | ||
Latest revision as of 17:47, 13 August 2017
Economic Order Quantity or Economic Order Quantity Optimization is a Term describing the calculation of the optimal ordering quantity for replenishment orders and the Practice to optimize ordering quantities. The Economic Order Quantity model balances inventory costs with ordering costs.
Use Cases
- Determining reordering quantities for production materials
- In Retail: Determining optimal ordering quantities
Calculation
| Economic Order Quantity | |||||
| = |
| ||||
where
- D = Annual demand (in UoM)
- C o = Ordering costs per order (in Currency)
- C h = Annual inventory holding cost (in Currency)
Alternative names for Economic Order Quantity include: Optimal Order Quantity.
Notes
Benefits of Economic Order Quantity
- The model limits the impact of errors in cost and demand estimates.
Criticisms of Economic Order Quantity
- The model assumes demand during the year is constant, supplier lead-time is constant and products ordered are delivered in full.
- The model assumes the cost of ordering is a flat fee. Most use cases show substantially higher cost per order for small quantities.
- The model assumes the cost of ordering (C o ) is a substantial cost element. With modern ordering methods these cost are no longer substantial; making the Economic Order Quantity calculation less relevant. Consider replacing Ordering costs per order with order volume discount.
Use with care: OpenReference recognizes this as an outdated Practice.
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