Economic Order Qty

EOQ is basically a point when order costs and inventory carrying costs are at a bare minimum. The EOQ takes into consideration all costs associated with ordering and carrying a product. This concept is criticized by some experts because demand is assumed to be known and constant throughout the year. Further, ordering and carrying costs are also assumed to be a fixed amount per year. In the real world, there is a lot more fluctuation. The demand is not usually fixed and seems to move in cycles. This is especially true when it comes to seasonal and perishable products. However, EOQ is a theoretical tool. All theoretical tools are limited in one way or another in practical application. EOQ is one such model. It may be slightly limited but it still has a great deal of value.

EOQ also reduces variability and allows better planning since transportation costs vary with the quantity of shipment and the quantity shipped per year. Since it does not take much more manpower and planning to ship 100 units of a product than it takes to ship 15 units, volume discounts are offered by transportation companies because larger volumes and fewer shipments reduce overall operational expenses, inventories and paperwork and hassels. This cuts down administrative expenses to the bone. Logisticians have many tools at their disposal which can be used to reduce inventory expenses. A purchasing manager strives to use many of these tools to reduce unnecessary inventory. EOQ is among the classics. The purchasing manager uses a whole bunch of inventory formulas, inventory diagrams (e.g. saw tooth) and models like EOQ and FTL vs. LTL to compare inventory transportation trade-offs. While doing these calculations, a logistics manager should also take into account the strategic goals of an organization and the impact of PLC on EOQ. This should enable him to determine the benefit of these trade-offs and EOQ is just one of the classic tools for accomplishing that objective.