algo-sc-eoq
Economic Order Quantity (EOQ)
Overview
EOQ determines the order quantity that minimizes total inventory cost = ordering cost + holding cost. Formula: EOQ = √(2DS/H) where D=annual demand, S=ordering cost per order, H=holding cost per unit per year. Assumes constant demand and instantaneous replenishment.
When to Use
Trigger conditions:
- Setting standard order quantities for inventory replenishment
- Balancing ordering frequency against warehousing costs
- Baseline calculation before applying safety stock adjustments
When NOT to use:
- When demand is highly uncertain (use newsvendor model)
- When products are perishable with short shelf life
- When quantity discounts change the cost structure significantly
Algorithm
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