Economic Order Quantity (EOQ) – Advantages and Disadvantages

7/20/20 10:30 AM

Having adequately managed inventory and an efficient inventory system is absolutely essential when attempting to maximize profits – especially within small business. Utilizing the Economic Order Quantity (EOQ) model is a commonly utilized element of a continuous review inventory system. It is based upon a formula that accurately calculates the most economical number of items that a business needs to order in order to minimize cost and maximize value when attempting to re-stock inventory in the most accurate manner possible. Small business owners need to evaluate advantages and disadvantages of this inventory model before choosing to implement it.

Economic Order Quantity (EOQ) - Advantages and Disadvantages

When utilizing the Economic Order Quantity (EOQ), there are a series of advantages and disadvantages that can help you with deciding whether or not you should utilize the metric for your inventory. Economic Order Quantity (EOQ) may be able to provide insight into your inventory situation and ultimately locate ways to maximize profits and reduce costs within your organization or manufacturing operation. Therefore, here are the advantages and disadvantages pertaining to economic order quantity (EOQ).

The Advantages of Economic Order Quantity (EOQ)

There are a few advantages pertaining to Economic Order Quantity (EOQ) and demonstrate how it can benefit your business:

  • Minimizing Storage Cost – Storing inventory may be extremely expensive for any operation, especially small businesses. The main advantage pertaining to the EOQ model is the customized recommendations that are provided regarding the most economical number of units per order. Locating this number can aid with suggesting larger or smaller quantities per order to take advantage of potential bulk buying or options. This could easily reduce storage costs as you develop a thorough understanding of how much inventory is needed. 
  • Business Specific – Maintaining sufficient inventory levels to match customer demand is a balancing act for many small businesses. Another advantage pertaining to the EOQ model is that it is able to provide specific numbers particular to the business regarding how much inventory needs to be held, when to re-order it, and how many items are needed to be ordered. This can smooth out the re-stocking process and ultimately results in enhanced customer service.

The Disadvantages of Economic Order Quantity (EOQ)

The disadvantages of economic order quantity (EOQ) consist of the following:

  • Math Complications ­– While the model can be beneficial and help in understanding inventory, the EOQ model requires a thorough understanding of algebra, which may be a disadvantage for small business owners that are lacking math skills. Effective EOQ models require detailed data to calculate several figures. The benefit to resolving the math is the ability to determine how much inventory should be attached to each order at the lowest possible counts. EOQ software could be another option if you find yourself lacking algebra and math skills.
  • Assumption Based ­­– Utilizing EOQ models assume steady demand of a business product, which is not the case for majority of organizations. There is seasonality for all types of businesses, and there needs to be an accounting for inventory during peak periods. It assumes fixed costs of inventory units, ordering charges, and holding charges. This inventory model requires continuous monitoring of inventory levels.

A software that can aid with adequate inventory management is PlanetTogether’s Advanced Planning and Scheduling (APS) Software. Advanced Planning and Scheduling (APS) Software is a must for manufacturing operations around the globe that are seeking to enhance operational efficiency and ultimately ensure that costs are reduced. APS Software is being implemented into operations around the globe and manufacturing facilities are experiencing profitability increase, cost reduction, and operational efficiency enhancement.

Advanced Planning and Scheduling Software 

Advanced Planning and Scheduling (APS) software has become a must for modern-day manufacturing operations due to customer demand for increased product mix and fast delivery combined with downward cost pressures. APS can be quickly integrated with a ERP/MRP software to fill gaps where these system lack planning and scheduling flexibility and accuracy. Advanced Planning and Scheduling (APS) helps planners save time while providing greater agility in updating ever-changing priorities, production schedules, and inventory plans.

  • Create optimized schedules balancing production efficiency and delivery performance
  • Maximize output on bottleneck resources to increase revenue
  • Synchronize supply with demand to reduce inventories
  • Provide company-wide visibility to capacity
  • Enable scenario data-driven decision making

Implementation of Advanced Planning and Scheduling (APS) software will take your manufacturing operations to the next level of production efficiency, taking advantage of the operational data you already have in your ERP.

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Topics: economic order quantity

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