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Principle behind using this technique is to determine level of keeping inventory so that cost of reordering and carrying, to company, is low.
Cost of ordering and cost of keeping inventory are two factors that determine when to order goods and materials and at what quantity. Minimizing the combined costs is the approach that led to the development of Economic Order Quantity Formula.
Economic Order Quantity Formula is the right quantity for purchase of inventory where cost of the inventory will minimum & lead time will be minimum.
