The economic order quantity formula of continuous supply of inventory is a mathematical formula used to determine the best economic order quantity. Its goal is to balance inventory cost and order cost, so as to achieve optimal supply chain management. EOQ refers to the order quantity that minimizes the inventory cost in a certain period of time. EOQ formula includes the following elements: demand, ordering cost, unit storage cost and unit purchase cost.
Demand refers to the number of products needed in a certain time range. Demand can be a known fixed value or a predicted average. Secondly, ordering cost refers to the cost generated by each order, including purchasing cost, transportation cost and ordering cost. Ordering costs mainly include fixed costs and variable costs related to orders. Unit storage cost refers to the cost of storing unit products in a certain period of time. These costs may include inventory management, storage equipment, insurance costs, etc.
Unit purchase cost refers to the purchase price of each product. Among them, EOQ stands for economic order quantity, D stands for demand, S stands for order cost, and H stands for unit storage cost. The derivation of this formula is based on some assumptions, including fixed demand, fixed order cost and unit storage cost, and no discount on order quantity. According to these assumptions, EOQ model can provide an optimal order quantity to minimize inventory cost and order cost.
Using this formula, enterprises can determine the best order quantity and avoid the problem of too much or too little inventory. If the order quantity is less than EOQ, it may lead to frequent orders, higher order cost and shortage risk. On the contrary, if the order quantity is greater than EOQ, it may lead to inventory backlog, high storage cost and difficult capital turnover. To sum up, EOQ formula is a mathematical tool to determine the best economic order quantity.
The importance of continuous supply of inventory and economic order
Reduce capital occupation: inventory is the form of capital occupation of enterprises. Too much inventory will lead to shortage of funds, and too little inventory may lead to shortage. Through economic order batch, enterprises can reduce the inventory level on the premise of meeting the demand, thus reducing the cost brought by capital occupation.
Reduce inventory costs: Inventory costs include not only purchase costs, but also storage, management and scrapping costs. By calculating the economic order quantity, enterprises can minimize the storage cost and processing cost, thus reducing the inventory cost.