Economic Order Quantity

What is economic order quantity?

When you are involved in the production process you tend to buy the goods that you will be using in the process. The goods that you will be using are large in quantity and are expensive in nature, so in order to avoid any wastage and to make a good usage of the goods it becomes necessary that proper planning is been made and the order of the quantity of the required goods are made in the economic manner.

Factors that influence the economic order quantity

• Production of goods based on the past trends. Like for instance during a year the demand for the goods produced might be more but for the next year the demand for the same goods might be less. So in such a scenario if the manufacturer orders more goods expecting the same level of revenue the next year, then the organization will definitely face loss.
• Cost of the products that are needed in the production process.
• The variation in ordering cost; based on the season and the need the cost of the product will vary. So it is up to the manufacturer to decide on the best time to invest in buying the needed goods.
• Availability of proper storage space for the easily perishable and excess goods
• The demand of the product
• The nature of the product
• Availability of the needed goods throughout the year
• Preserving the goods in reserve
• The quantity of goods that is needed to be kept as backup, so that the production process is not withheld due to lack of resources
• Inventory costs
• Cost of production

By calculating the economic order quantity you will get o know that how much is that you will really require and how much is surplus amount for the production process. By getting an idea about the cost you will definitely save a lot of money in future. This method of calculating will also give you a better understanding of the requirements of production process.

Questions:

• What are the factors that influence economic order of quantity?
• Are the results obtained accurate?