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the EOQ model considers holding costs and ordering costs when determining reorder amounts and frequency. Holding costs are quite literally the cost of space and capital that is being "held up" by the product in the stores rather than allowing that space to be used by another product of for another purpose. While ordering costs are any and all costs associated with the ordering and shipping of product, this cost is increased with each order placed. Through the EOQ model business owners can find the optimal amount of inventory to minimize costs (INC.com, 2018).
I would imagine that EOQ would be helpful in ensuring a store did not run out of a popular product just as much as it would be helpful in minimizing holding and order costs. Because without product you do not have sales, no sales equates to no revenue. For example, there is a small business near me that specializes in livestock feed and equipment. They have serious competition since there are several larger chain style retailers in the area specializing in the same thing. I like shopping small so I check out the store, however sadly multiple times they did not have my specific feed in stock. It was due to poor EOQ planning. But the big store across the street never ran out of my horses' feed, so where am I forced to shop? The large retailer. Obviously this example shows the importance of proper EOQ modeling and planning, as it can cost business should the poor planning continue to happen. As it was a popular product it would be best for the small business to incur more ordering costs as the holding cost is next to nothing, this product is flying off of the shelf.
Businesses or companies utilize the Economic Order Quantity (EOQ) model for making important decisions on inventory matters. The major inventory costs that are used are inventory costs such as the annual ordering costs predicting the number of orders made multiplied by how much it cost the company to pay for those orders, and the annual carrying cost which is the average inventory multiplied by the inventory carrying cost per unit (Render, et. al., 2018). There are many factors that come into play for finances when it comes to running a business. The EOQ model helps to decide how much to pay to purchase inventory based on the demand rate for items sold per year, the holding costs for items that do not sell, and other variables (Kenton, 2018). Looking at this concrete, factual evidence will accurately allow the business managers to forecast on what they need to order and how much.
An example of when EOQ could be used to improve inventory decisions is my Dad's small business of sealcoating. He took out a small loan a couple years ago, and got started locally. He has to worry about the seasonal aspect that some months he gets more customers than others, as well as taking in account the costs of the supplies he needs and the costs to store those supplies when he is not actively using them. Small businesses like his could definitely benefit from using EOQ calculations to minimize the cost of their inventory and to make smart inventory decisions on how much to keep in stock at certain times of the year.
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