What is an EOQ formula?
‘EOQ formula’ refers to a formula to determine ‘Economic Order Quantity.’ This formula is applicable to businesses that involve the selling of goods and maintaining optimal inventory levels to keep up with operational demands. In these types of businesses, EOQ is the optimum order quantity that leads to the greatest economy in terms of purchasing raw materials, production, inventory management, and the delivery of goods. Through the EOQ formula, businesses will determine the most ideal order size as this will eventually result in the lowest inventory costs. In most businesses, keeping up with demand is not the only principle or guideline to be followed. Moving products in and out of one’s storage facility, for example, is not the only thing that matters to a business’ bottom line. In order to become more economical and profitable, some part of the process must be streamlined and studied for more efficiency. In terms of inventory management, the EOQ formula will guide businesses on how many orders result in lower costs in the form of supplies ordering, production, and eventual delivery of goods.
There are some requirements to the EOQ formula before it can be used to get the optimal supply or product orders. The cost of ordering and the order rate for a given year must be the same or constant. The cost of buying supplies and the lead time involved in terms of material acquisition must also remain constant. In terms of delivery, ordered products are shipped to customers on a per-batch basis to ensure that no additional costs are incurred. With all these variables controlled, then a business will be able to get the optimal order quantity or EOQ.
The EOQ formula is also referred to as the Barabas formula and was originally developed back in 1913 by a man named Ford Harris. A consultant to the Barabas EOQ model named R. H. Wilson is also given credit for his contribution to this inventory framework.