What are the importance of EOQ and what are its applications ?
The Economic Order Quantity, often known as EOQ, refers to the optimal order quantity of raw materials that a company or other commercial enterprise ought to have in order to reduce the holding costs, order expenses, and storage costs. Ford W. Harris initially introduced the model in 1913, and it has since undergone a number of iterations and adjustments.
If the corporation places a number of smaller orders, the total number of orders will increase, which will result in increased ordering costs. It will also lead to an increase in the cost of storing things.
For instance, a car store that caters to customers with moderate to high incomes is able to sell 1,000 vehicles annually. A car in the showroom's inventory will run you an additional Rs 500 a month, and the fixed fee of placing an order will set you back an additional Rs 2,000. For the aforementioned, the EOQ is as follows:
EOQ= 2DP/C = 2∗1000∗2000/500
= 8,000 units
Therefore, the optimal order size to minimise expenses while still satisfying the demand of the clients is 90 units.