WHAT IS AN ECONOMIC ORDERING QUANTITY (EOQ)?
To further economize in the replenishment planning process, the most economic lot sizes or production sizes should be determined. Ordering an optimal amount helps eliminate unnecessary stock and maximize return-on investment. There are many costs associated with the ordering process. The optimal order quantity is determined by minimizing the sum of these costs over the next year. Frequent ordering means high ordering/receiving costs while large EOQ’s mean too much to store in a cost effective manner. Major costs associated with ordering are: After a statistical forecast has been derived (and adjusted), attention should be focused on how to plan for that future demand. SMS has forecast how much is expected to be used during the next lead time horizon. How should the necessary quantities be procured? What is the least cost alternative to procurement? Should large quantities be ordered less frequently? Should small quantities be ordered more frequently? These questions are addressed by ca
