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.
- Determining reordering quantities for production materials
- In Retail: Determining optimal ordering quantities
- 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.
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Use with care: OpenReference recognizes this as an outdated Practice.