Page 408 - F1 Integrated Workbook STUDENT 2018
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Chapter 24
3.3 Calculations
The objective of good inventory management is therefore to determine:
The optimum re-order level (ROL) – how many items should be left in inventory when
the next order is placed, and
The optimum re-order quantity (EOQ) – how many items should be ordered when the
order is placed
In practice, this means striking a balance between holding costs on one hand and
stock out and re-order costs on the other.
3.4 Economic order quantity (EOQ)
For businesses that do not use JIT inventory management systems there is an
optimum order quantity for inventory orders, the EOQ. The aim of the EOQ model is
to minimise the total cost of holding and ordering inventory.
The EOQ can be found using a formula
2CoD
EOQ= ඨ( )
Ch
Where:
CO = cost per order
D = annual demand
CH = cost of holding one unit for one year.
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