Economic Order Quantity

The Economic Order Quantity (EOQ) is a measure used in the field of operations, logistics and supply chain management. It's a method that determines the number of units a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.

Here are the steps to calculate EOQ:

1. Identify the Demand: The first step in calculating EOQ is to determine the level of demand for the product. This is usually based on historical sales data and forecasts.

2. Determine the Order Cost: The next step is to determine the cost of placing an order. This includes costs such as delivery charges, invoice processing, and payment processing.

3. Determine the Holding Cost: This is the cost of storing the product until it is sold. It includes costs such as rent, utilities, insurance, depreciation, and opportunity cost of capital.

4. Use the EOQ Formula: Once you have these three figures, you can use the EOQ formula to calculate the optimal order quantity. The formula is:

   EOQ = √[(2DS)/H]

   Where: D = Demand in units (typically on an annual basis) S = Order cost (per order) H = Holding cost (per unit, per year)

5. Review and Adjust: The EOQ should be reviewed regularly and adjusted as necessary to reflect changes in demand, order cost, and holding cost.

Remember, the goal of EOQ is to minimize total inventory cost. It's a balance between ordering cost (which decreases as order quantity increases) and holding cost (which increases as order quantity increases).