*Opportunity cost = the money you’ve lost by ignoring a profitable opportunity because of something like lack of storage space in your warehouse So if your business sees a lot of fluctuation in customer demand during various points in the year or quarter, EOQ can’t be used as a reliable replenishment model (at least not on its own). One thing to keep in mind, though: the EOQ formula assumes that your customer demand will stay consistent throughout the time period in question. And with lower storage costs for your existing products, you can also lower your opportunity costs*. Once you’ve calculated the best replenishment method, you can feel confident that you’re not overpaying for storage costs. Using the EOQ model as part of your inventory management strategy also allows you to manage your inventory levels. By manipulating the various parts of the formula, business owners can figure out the number of items they should order (and how often they should submit purchase orders) to minimize their storage and production costs. The economic order quantity model is most commonly used to determine the costs of inventory in a given time period. You can use this formula to determine the optimal quantity of products you should order at a time and how often to order (assuming customer demand stays constant). The EOQ formula helps you determine your total inventory costs (including both production and storage costs). The trick is knowing your optimal order quantity to help you balance your production costs and your inventory carrying costs. And ordering more units at a time would make your storage cost higher. Then, once you’ve received your products, you have to pay to store those products. But increasing your ordering cost by ordering more products at a time may allow you to enjoy a quantity discount (lower cost-per-item). In some cases, you may also have to pay a flat fee per order as well. Economic order quantity (EOQ) is a replenishment model designed to help you minimize your inventory costs, and overall, improve your inventory and supply chain management.Įvery time you place a purchase order, you have to pay the item manufacturer for your goods.
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