What Is Inventory and Economic order quantity (EOQ)? How important it is and how its impact on annual profit of any manufacturing company?
Inventory is (popularly known as stock) an important current assets which can be converted in cash in less than one year. It is the part between purchase and production, between beginning of production and sale of goods.
Economic order quantity (EOQ)technique: EOQ is the Quantity for inventory of any warehouse or purchase department which can reduce their working capital requirement as well increase the profit overall, EOQ is that Quantity of inventory, when order cost and inventory carrying cost are same and annual carrying cost arrives on lowest level.
At EOQ, not only the annual inventory cost is minimum but ordering cost is equal to inventory carrying cost.
Too much inventory can reduce profit due inventory carrying cost as well as too less inventory can lead to stock out situation which can result in loss of profit as well as loss in business.
EOQ is the optimum for the most favourable quantity, which should be ordered for purchase each time when the purchases are to be made. It is also known as standard order quantity and its depend on cost of carrying and cost of ordering and receiving per order.
Objectives:
Operative objective aims at avoiding production bottlenecks by providing continuous supply of all types of materials, avoidance of wastes like theft, pilferage, leakage, spoilage etc.
The financial objective of inventory management include effecting economy in purchasing through economic order quantity and taking advantage of favourable markets, maintaining optimum level of investment in inventories etc.
