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Economic order quantity (EOQ) Inventory management model


The Economic order quantity (EOQ) is multiple order inventory model which determines an optimal fixed order quantity once the inventory level drops to a certain point, which is called the re-order point. This model is also called the Q model, fixed order quantity model, or sawtooth inventory level model. It is used in inventory management to avoid product stock outs when there is a certain lead time for products and a steady demand pattern. The model uses the following information about the products being ordered:

Annual demand for the product (D)
Annual demand is assumed to be stable

Setup costs for placing each order (S)

Order lead time in days (L)

Annual inventory holding costs (H)

Optimal order quantity (Q)

Inventory order trigger level (R)

The formula for the optimal order quantity (Q) is the following:

Q = [(2*D*S) / H] ^(1/2)
^(1/2) = square root

The answer for Q is the most optimal order size to place at one time when the total inventory level reaches the inventory order trigger level (R). The model can also be used with safety stock.

The formula for the Inventory order trigger level (R) is the following:

R = d*L

Where d is the daily demand for the product.

This one of the most popular inventory control models and is used extensively in many industries, businesses, and inventory software packages to manage inventory levels and production planning. In some production plants it is used in the form of a two bin inventory system


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