From the course: Operations Management Foundations
Join today to access over 23,200 courses taught by industry experts.
Economic order quantity
From the course: Operations Management Foundations
Economic order quantity
- So, how much inventory should we order? That's one of the big questions operations managers face. Before we start to find the answers, let's remember that the total cost of inventory includes buying, holding, and ordering the inventory. With so many costs, each with so many variables, trying to find the best inventory order size can be challenging and even confusing. Not to worry, though. In operations, we have a wonderful tool, economic order quantity. It's the order size that will provide you with the lowest total inventory cost. That's exactly what we're looking for, isn't it? So, how do we find the EOQ? Well, EOQ is the square root of 2DS over H, where D is our annual demand, S is the cost to place a single order, and H is the cost to hold a single unit of inventory for an entire year. So let's say that, through forecasting, we find that our annual demand is likely to be 6,400 units. It costs us about $320 every…
Download courses and learn on the go
Watch courses on your mobile device without an internet connection. Download courses using your iOS or Android LinkedIn Learning app.