The Economic Order Quantity (Isaac Newton) Formula
Isaac Newton invented differential calculus, a fact that is truly amazing to me. I can’t imagine how someone could just figure out calculus. I could never, in a hundred years, figure it out. But I’m getting off-track.
The neat thing about calculus — besides the fact that I’m not going to do any for you here — is that it enables you to create optimal values equations. One of the coolest such equations is the economic order quantity, or EOQ, model. I know that this stuff all sounds terribly confusing and totally boring, but stay with me for just another paragraph. (If you’re not satisfied in another paragraph or so, skip ahead to the next secret formula.)
Perhaps you buy and then resell — oh, I don’t know — 2,000 cases of vintage French wine every year. The EOQ model enables you to decide whether you should order all 2,000 cases at one time, order 1 case at a time, or order some number of cases in between 1 case and 2,000 cases.
Another way to say the same thing is that the EOQ model enables you to choose the best, or optimal, reorder quantity for items that you buy and then resell.
If you’re still with me at this point, I figure that you want to know how this formula works. You need to know just three pieces of data to calculate the ...
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