Working of EOQ and FOQ
The Economic Order Quantity (EOQ) is the number of units that a company should add to
inventory with each order to minimize the total costs of inventory—such as holding costs,
order costs, and shortage costs. The EOQ is used as part of a continuous review inventory
system in which the level of inventory is monitored at all times and a fixed quantity is
ordered each time the inventory level reaches a specific reorder point. The EOQ provides a
model for calculating the appropriate reorder point and the optimal reorder quantity to
ensure the instantaneous replenishment of inventory with no shortages. It can be a valuable
tool for small business owners who need to make decisions about how much inventory to
keep on hand, how many items to order each time, and how often to reorder to incur the
lowest possible costs. The EOQ model assumes that demand is constant, and that inventory
is depleted at a fixed rate until it reaches zero. At that point, a specific number of items
arrive to return the inventory to its beginning level. Since the model assumes instantaneous
replenishment, there are no inventory shortages or associated costs. Therefore, the cost of
inventory under the EOQ model involves a tradeoff between inventory holding costs (the
cost of storage, as well as the cost of tying up capital in inventory rather than investing it
or using it for other purposes) and order costs (any fees associated with placing orders,
such as delivery charges). Ordering a large amount at one time will increase a small
