How does the concept of EOQ help companies?

The Economic Order Quantity (EOQ) is a fundamental concept in inventory management that assists companies in determining the optimal amount of inventory to order, thereby minimizing total inventory costs. By calculating the EOQ, companies can balance the costs of ordering and holding inventory. This balance is crucial because while ordering in larger quantities can reduce shipping costs per unit, it also increases holding costs due to the need for storage and potential spoilage or obsolescence.

When a company uses EOQ, it aims to lower two main types of costs: ordering costs and holding costs. Ordering costs decrease as order size increases, but holding costs rise with larger amounts of stock. The EOQ formula helps find the point where these two costs reach their minimum combined total, enabling companies to operate more efficiently and effectively.

This focus on minimizing total inventory costs ultimately leads to improved cash flow, reduced waste, and a more streamlined supply chain management process. Thus, the relevance of EOQ to companies lies in its ability to optimize inventory levels and reduce unnecessary expenditure.