On the other hand, too little inventory can lead to production shutdowns, which are even more costly. Too much inventory results in wasted resources like storage space, labor, and materials. EOQ can do this by helping to optimize inventory levels that are neither too high nor too low. Reduced production costĪvoiding spoilage or obsolescence is key to reducing production costs. This improved customer service will lead to increased sales and repeat business, adding to lifetime value. Not only do you lose the sale, but you also damage your reputation and risk losing future business.ĮOQ can help businesses avoid stockouts by ensuring that there is always enough inventory on hand to meet customer demand. This is called a stockout, and it can be very costly for businesses. If you have ever tried to order a specific product only to be met by an “out of stock” pop-up, you know the frustration of not being able to find what you need when you need it. This would reduce your average inventory, and in turn, your total cost associated with holding products would be significantly slashed. Now, let’s say you use EOQ to calculate that you should be ordering 200 units at a time. This means your total carrying costs are $1,000 per year. Wages for employees who manage inventoryīy using EOQ to calculate the optimal quantity of inventory to order, you can minimize the total direct cost and free up working capital.įor example, let’s say your carrying cost is $2 per unit per year, and you average 500 units in stock.Rent or mortgage payments for storage space.These are the costs associated with holding inventory, and they can add up quickly if you have too much inventory on hand. One of the main benefits of EOQ is that it can help reduce hold. There are several key benefits of using EOQ to improve inventory management. This can result in high holdings costs or even production shutdowns.ĮOQ can help businesses avoid these costly mistakes by finding the perfect balance between meeting customer demand and minimizing costs. Without continuously improving your inventory management systems, it is easy to fall into the trap of over-ordering or under-ordering inventory.
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