# What is Economic Order Quantity and Its Assumptions?

Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal quantity of goods that should be ordered at one time.

It helps to strike a balance between carrying costs and ordering costs, aiming to minimize total inventory costs.

## The assumptions underlying the EOQ model

**Demand is known:** The EOQ assumes that the demand for the product is constant and accurately known during the entire planning period.

**Constant lead time:** The lead time, which refers to the time between placing an order and receiving it, is assumed to be constant and consistent for each order.

**No stockouts or backorders:** The EOQ assumes that there will be no stockouts or backorders during the planning period. This assumption implies that replenishment will always occur before running out of stock.

**Instantaneous delivery:** It is assumed that once an order is placed, it will be delivered instantaneously without any delays.

**Fixed purchase cost:** The cost of placing an order, usually including administrative expenses such as processing paperwork and transportation costs, remains constant regardless of the order quantity.

**Constant **holding cost: The holding cost, which includes expenses such as warehousing, insurance, and obsolescence, is assumed to remain constant per unit over time.

**No quantity discounts**: The EOQ does not consider any discounts provided by suppliers based on larger order quantities.

**Single product focus:** The EOQ model assumes that only one item is managed at a time, assuming no interactions with other products or constraints regarding available space or production capacity.

## Conclusion

It’s important to note that while these assumptions simplify the calculations and implementation of the EOQ model, they may not always hold true in real-world scenarios. Therefore, adjustments and modifications may be necessary based on specific business situations and requirements.

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