Introduction
An economic order quantity (EOQ) is the number of units a business should attach to the stock on each order to reduce the recorded overall cost, including leasing costs, requests, and default penalties. Every manufacturing company wants to manufacture high-quality products in today’s competitive business climate. (Nobil et al., 2020, 1339). It makes it burdensome or impractical to adjust for corporate events like changes in consumer demand, seasonal variations in inventory pricing, missed price compared to stock-outs, or discount offers that a firm may obtain when acquiring considerable amounts of goods in the calculation (Kumar, 2016, 5).
The EOQ is part of the ongoing inventory system for checking the inventory level and ordering a specified quantity if the inventory level exceeds a defined reorder threshold. The EOQ is a method for determining the suitable reordering, and optimal reorder to guarantee that the stock is refilled without shortage and quickly. It can be helpful for small business owners who have to choose how much stock they need to have, how many items they order each time, and how often they need to refill to bring costs down.
The EOQ model implies steady demand and inventory depletion at a constant pace until it reaches zero. A certain amount of things arrives at that point, restoring the inventory to its original state. The inventory or associated costs are not deficient since the model is instantly refilled. Consequently, the inventory costs of the EOQ model are a compromise between inventory holding and ordering costs. Ordering a significant amount at once boosts the holding costs of a small firm, whereas ordering less often reduces the cost of keeping but increases the cost of orders. The EOQ model determines the quantity that reduces the total cost. This assessment provides a critical assessment of trends in operational management and their impact on organizational practice. This work was written with the aim of revealing the topic of the quantity of the economic order.
The Goal of the EOQ
The EOQ formula’s objective is to determine the best range of product sets to order. A company’s expenses for purchasing, distributing, and keeping modules can be reduced if this goal is met. Companies with vast supply chains and significant variable costs utilize an algorithm in their computer software to estimate EOQ, and the EOQ formula may be changed to predict alternative production levels or order intervals.
The EOQ is a crucial cash flow instrument. The formula can assist a business in controlling the amount of cash held in its inventory balance. Inventory is, aside from human resources, the most valuable asset for many firms, and these organizations must keep enough inventory on hand to satisfy consumer demands. If EOQ can assist reduce inventory levels, the money saved can be used toward another business project or investment.
The EOQ formula is used to identify when a company’s inventory needs to be reordered. When inventory levels drop below a particular threshold, the EOQ formula signals the need to submit a market regime for more modules when implemented to business operations. The firm prevents running out of inventory and may continue to satisfy client requests by calculating a reorder point. When a firm runs out of inventory, it incurs a shortfall cost, income loss due to a lack of inventory to fulfill an order. A lack of inventory might result in the firm losing a customer or the client ordering less in the future.
Economic Order Quantity Usage
The optimal order amount for a firm to acquire in order to reduce inventory expenses, including holding charges, shortfall costs, and order fees, is known as the economic order quantity (EOQ). Typical economic order quantity (EOQ) scenarios are sheltered by considering the purchase and carrying costs across the total cycle time. (Shaikh et al., 1365, 2019). Control of inventory, which involves the purchase, collection, and use of an inventory of a firm, requires the use of EOQ. Inventory management is responsible for determining how many units a firm should increase to its inventory for each lot transaction in order to decrease inventory holding expenses.
The EOQ model aims to guarantee that the appropriate quantity of inventory is ordered every batch so that a firm does not have to place orders excessively regularly and does not have an oversupply of inventory levels. Inventory stock charges and stock value stream are believed to be trade-offs, with total inventory costs being reduced when both installation and holding costs are reduced.
The EOQ takes into account the frequency of restocking, the cost of making a purchase, and the cost of keeping products. The ordering expenses are more significant, and there is a need for more storage space if a firm is continually placing minor purchases to maintain a certain inventory level. Consumer demand is assumed to be constant in the EOQ calculation. Both purchase and cash requirements are assumed to be constant in the computation.
Limitations
It makes it extremely difficult, if not impossible, for the formula to adjust for business activities such as shifting customer demand, seasonal variations in inventory prices, missed sales income due to inventory limitations, or discount offers a firm may receive for purchasing inventory in larger quantities. The demand for product components is predictable, continuous, and constant, and the total of the order, operation, and order quantities must be reduced under basic EOQ settings. (Godichaud and Amodeo, 2019, 5685). The premise of continual consumption and rapid or near-instantaneous inventory replenishment is not always feasible. Because supplies from suppliers may be postponed for causes beyond their control, the stock level is always necessary. Also, there is a chance that stock prices will arise unexpectedly.
Advantages
Inventory storage may be costly for small businesses. The vital advantage of the EOQ model is that it makes customized proposals for the most economical amount of units per order. In order to benefit from good buying discounts and minimize buying expenditures, the model might propose buying a considerable quantity in fewer orders. Otherwise, it may advise further purchases for fewer products to decrease inventory costs if holding costs are high and picking costs are low.
It is a sensitive balancing act for many small companies to maintain sufficient inventory levels to fulfill customer demand. The EOQ model also provides accurate data on how much inventory to maintain when it is replenished and how many goods to buy, all of which are relevant to the company. It streamlines the refilling procedure and improves customer service by ensuring the product is accessible when needed.
Disadvantages
The EOQ model necessitates a solid grasp of mathematics, which is a disadvantage for small businesses that lack such abilities. Furthermore, successful EOQ models need extensive data in order to generate a number of numbers. The ability to decide how much inventory should be linked to each order at the lowest possible cost is an advantage of resolving the mathematics. Keeping expenses low will boost margins and, as a result, generate more income. For small businesses who do not have the time or money to engage a consultant or staff to do regular calculations, EOQ software may be worth the cost.
The EOQ model implies consistent demand for a company product as well as rapid availability of restockable products. Seasonal or economic changes are not taken into consideration. It takes into account fixed expenses for inventory units, ordering fees, and holding fees. This inventory methodology necessitates constant proper inventory management. The premise of a one-product business limits the efficacy of the basic EOQ model because the formula does not permit the simultaneous purchase of several goods.
Importance
The ordering number is determined by the quantity of economic order (EOQ). Efficient inventory is a type of inventory that reduces the overall cost of inventory management. It is a metric used in operations, logistics, and operations management. Inventory storage may be costly for small businesses. The significant benefit of the EOQ model is that it provides personalized suggestions for the most cost-effective quantity of units per order. The model may recommend purchasing a significant amount in fewer orders to take advantage of excellent buying discounts and minimize purchase costs. Alternatively, if holding costs are high and ordering costs are low, it may suggest more orders of fewer goods to reduce holding costs.
For many small firms, maintaining enough inventory levels to meet client demand is a delicate balancing act. Another benefit of the EOQ model is that it offers precise figures for how much inventory to keep, when to replenish it, and how many products to purchase, all of which are relevant to the firm. It streamlines the refilling process and improves customer service by ensuring the product is accessible when needed.
The EOQ model implies consistent demand for a company product and rapid availability of restocking products. Seasonal or economic variations are not taken into consideration. It assumes that inventory units have fixed costs, as well as ordering and storing expenses. This inventory strategy necessitates constant proper inventory management. The premise of a single-product firm severely restricts the fundamental EOQ model’s efficacy, and the formula does not permit the simultaneous purchase of several goods.
IKEA’s Vision
IKEA has a clear mission: to deliver well-designed, practical home goods at affordable costs for as many people as possible. The company’s different activities, such as supply chain management and inventory management, work together to provide its unique value offer. IKEA sets itself apart by promising a product page that will be supplied for a year at a fixed price. IKEA produces goods that meet strict operation, delivery efficiency, quality, and environmental impact requirements at low production costs. Without compromising quality or lifespan, IKEA aims to produce furniture from as few materials as possible. Because it takes less fuel and personnel to acquire supplies and ship goods, the firm saves transportation expenses by utilizing fewer resources. IKEA’s success may be attributed in part to its ability to communicate and manage relationships with materials suppliers and manufacturers in order to obtain excellent rates on the items it purchases.
Logistics personnel’s responsibilities include tracking and recording deliveries, double-checking shipping notices, sorting and separating items, and delivering them to the appropriate sales area or specified overstock areas. Overall, they enable a smooth movement of merchandise inside IKEA shops, which is critical for sustaining solid sales and increasing customer loyalty. To react to store-level inventory reorder points and items, in-store logistics managers utilize an IKEA-developed inventory replenishment management technique called ‘minimum/maximum settings.’
Conclusion
In order to decrease the overall operating costs, such as storage charges, ordering fees, and shortcut charges, the economic order quantity (EOQ) is the number of units a firm should add to the stock order. The EOQ forms part of a continuous inventory review system for continuous monitoring of the inventory level, and a preset inventory amount is determined when the inventory level exceeds the default order thresholds. The EOQ is a methodology for calculating the best reorder point and amount to guarantee that inventory is quickly refilled without shortages. It might assist small businesses figure out just how much inventory they have to stock, how many goods they can purchase every time, and how often they can replenish to keep prices down.
The quantity of the economic order is the entire order; efficient inventory is a form of inventory that cuts inventory management costs in half. It is a measure that’s utilized in logistics, operations, and management. It makes it difficult, if not unattainable, for the formula to adjust for business activities like fluctuating consumer demand, seasonal fluctuations in inventory pricing, lost sales income owing to inventory constraints, or discount offers a firm may obtain for acquiring inventory in more significant amounts.
The EOQ model assumes that a company’s goods will be in high demand and that quickly replenishing products will be available. Seasonal or economic fluctuations are not taken into account. It assumes that inventory units have ongoing costs, as well as expenses for ordering and holding. This inventory approach demands good inventory management continuously. The premise of a single-product business significantly limits the core EOQ model’s usefulness, and the formula does not allow for the simultaneous procurement of several items.
References
Godichaud, M., & Amodeo, L. (2019). EOQ inventory models for disassembly systems with the disposal and lost sales. International Journal of Production Research, 57(18), 5685-5704.
Kumar, R. (2016). Economic order quantity (EOQ) model. Global Journal of finance and economic management, 5(1), 1-5.
Nobil, A. H., Sedigh, A. H. A., & Cárdenas-Barrón, L. E. (2020). Reorder point for the EOQ inventory model with imperfect quality items. Ain Shams Engineering Journal, 11(4), 1339-1343.
Shaikh, A. A., Khan, M. A. A., Panda, G. C., & Konstantaras, I. (2019). Price discount facility in an EOQ model for deteriorating items with stock-dependent demand and partial backlogging. International Transactions in Operational Research, 26(4), 1365-1395.