Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ)

EOQ is a mathematical formula designed to minimize the combination of annual holding costs and ordering costs. There is a lot of hype about just in time inventory systems (JIT), which achieve smaller inventories through very frequent orders, but frequent ordering can often result in an over-spending on ordering costs. Even though companies often miscalculate their ordering costs, which makes frequent ordering seem costly, EOQ is an important tool for determining what inventory should be?

Safety Stock

First of all, here’s the formula so you don’t have to dig through my well-written article for it.
Safety Stock: {Z*SQRT (Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand^2*Standard Deviation of Lead Time^2}.

Basics of Production Inventory Management

Production inventory management differs from general warehouse management because it involves the determination of how quickly to produce a particular product. The factors involved in many cases are similar, though there are some variances in making the final decision as to how quickly manufacturing should push items through the production line.

Available Materials

Of course, the first concern in production inventory management is on the front end of the process. If you don’t have the materials required for production, then you can’t move forward in providing the products to others. You must make certain that you have all the supplies you need, from raw materials to factory workers, to complete the production process.

Supply and Demand

you must determine the current demand for the product on the market.
Good production inventory management occurs when you produce just enough material to satisfy customers’ needs without overextending the production line and manufacturing too many of any given product
You don’t want an incredible amount of back stock lying around, as this detracts from your net profit.
On the other hand, you don’t want to be in short supply when a large order comes in, so having a little extra on hand is a great idea, and making sure you are prepared to make a production run for such orders is vital.

Quality Control

Never simply assume that everything manufactured will be flawless. An important consideration in production inventory management is to allow room for error. In other words, calculate a sufficient