Question

Why is the order reduced and the EOQ is reduced? what happen during this process？

Answer 1

Economic order quantity :-

Economic order quantity (EOQ) is the ideal order quantity a company should purchase for its inventory given a set cost of production, a certain demand rate, and other variables. This is done to minimize inventory holding costs and order-related costs.

The equation for EOQ also takes into account inventory holding costs such as storage, ordering costs and shortage costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has been refined over time. The formula assumes that demand, ordering, and holding costs all remain constant.

The formula for EOQ :-

Q = √2DS÷H

were, Q = EOQ UNITS

D = Demand in units (typically on an annual basis)

S = ordering cost (per order)

H = holding cost ( per unit, per order)

The goal of the EOQ formula is to identify the optimal number of product units to order so that a company can minimize its costs related to buying, taking delivery of and storing the units. The economic order quantity (EOQ) formula can be modified to determine different production levels or order interval lengths, and corporations with large supply chains and high variable costs use an algorithm in their computer software to determine EOQ.

EOQ is an important cash flow tool for management to minimize the cost of inventory and the amount of cash tied up in the inventory balance. For many companies, inventory is the largest asset owned by the company, and these businesses must carry sufficient inventory to meet the needs of customers. If EOQ can help minimize the level of inventory, the cash savings can be used for some other business purpose or investment.

The EOQ formula can be used to calculate a company's inventory reorder point, which is a specific level of inventory that triggers the need to place an order for more units. By determining a reorder point, the business avoids running out of inventory and is able to fill all customer orders. If the company runs out of inventory, there is a shortage cost, which is the revenue lost because the company does not fill an order. Having an inventory shortage may also mean the company loses the customer or the client orders less in the future.

By all the above given discussion we can know that the order unit and order cost is the he components of the EOQ and if those order and order cost get reduced then automatically the EOQ get reduced.

This is the process happen during this reduce in the order leads to reduce in the EOQ.

these are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.