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Many firms have thought about and acknowledged the necessity of implementing an economic order quantity model to help manage inventories over the years. Utilizing resources has always depended on an organization's capacity to effectively manage and control the flow of inventory. According to Agarwal (2014), effective inventory management is crucial because it helps the business to handle resources with high levels of efficiency and effectiveness. It also has a significant impact on preventing avoidable costs from occurring, which will boost profits by reducing unnecessary spending. In order to maintain optimum inventory in the organization implementation of EOQ is helpful as it accurately determines the required amount of stock.
In determining Economic order quantity three costs are important namely unit costs, holding costs and ordering costs. Holding costs are the cost incurred by the organization in storing inventory. It includes insurance, rent paid for space consumed and shrinkage costs. Ordering cost is a cost which the company incurs to placing and receiving an order. Unit costs represent the fixed costs of the inventory. This does not vary depending on the quantity purchased and is, therefore, a constant figure. According to Lucey (1992), the economic order quantity model, the ordering and holding costs does not rely on the order quantity.
This model is applied in organizations which require the constant supply of inventory. Hospitals require the EOQ model because it would be of great help managing the drugs available. This will ensure that patients are able to get assistance when needed and there is no idle inventory which could expire. It is necessary to implement the model in hospitals so as to ensure the objective of the hospital is met when due without any delays or extra cost to its customers.
Agarwal, Sachin. (2014). ECONOMIC ORDER QUANTITY MODEL: A REVIEW. International Journal of Mechanical, Civil, Automobile and Production Engineering, 4.
Lucey T (1992). Quantitative Techniques. 4th Edition. London: Ashford Color Press.
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