Question

Find the economic order quantity (EOQ) and explain what it means. The manager of a local retail store is ordering a specialty item from a supplier in Toronto. The lead time is constant at five days. The retailer's goal is to minimize inventory costs while ensuring the item is always in stock for customers

Answer 1

The economic order quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs. It helps strike a balance between the cost of placing orders and the cost of carrying excess inventory. By using EOQ, the retail store manager can determine the ideal quantity to order from the supplier.

Step-by-step explanation:

Economic Order Quantity (EOQ)

The economic order quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs. It is calculated based on the relationship between the ordering cost and carrying cost of inventory.

Calculation of EOQ

The EOQ can be calculated using the following formula:

EOQ = sqrt((2 × demand rate × ordering cost) / carrying cost per unit)

where:

• demand rate - the number of units required per period (e.g., per year)
• ordering cost - the cost of placing an order with the supplier
• carrying cost per unit - the cost of holding one unit of inventory for a certain period of time

Explanation of EOQ

The EOQ represents the optimal order quantity that minimizes the total cost of ordering and holding inventory. By using EOQ, the retail store manager can determine the ideal quantity to order from the supplier to minimize inventory costs while ensuring the item is always in stock. It helps strike a balance between the cost of placing orders and the cost of carrying excess inventory.