The optimal order quantity that minimizes the total cost of inventory including ordering costs and holding costs.
EOQ calculates the ideal quantity to order each time to minimize total inventory costs. Ordering too frequently increases ordering costs (processing, shipping, inspection). Ordering too much increases holding costs (storage, insurance, obsolescence, capital tied up). EOQ finds the sweet spot where total costs are lowest. Assumptions include constant demand, fixed ordering cost, constant holding cost, and no quantity discounts. Despite these simplifications, EOQ provides a practical starting point for inventory management decisions.
A retailer sells 10,000 units/year of a product. Ordering cost: ₹500/order. Holding cost: ₹20/unit/year. EOQ = √(2 × 10,000 × 500 ÷ 20) = √500,000 = 707 units. Optimal orders per year: 10,000 ÷ 707 ≈ 14 orders. Total cost at EOQ: 14 × ₹500 + (707/2) × ₹20 = ₹7,000 + ₹7,070 = ₹14,070.
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EOQ assumes constant demand (ignores seasonality), no quantity discounts (bulk pricing changes the math), instant delivery (no lead time variability), and single product (doesn't consider product interactions). Modern businesses use EOQ as a baseline, then adjust for real-world factors like MOQ, supplier discounts, and demand forecasts.
EOQ answers 'HOW MUCH to order' while Reorder Point answers 'WHEN to order.' Reorder Point = (Daily demand × Lead time) + Safety stock. Together they form a complete inventory policy: when stock hits the Reorder Point, place an order of EOQ quantity.
The inventory level at which a new purchase order should be placed to replenish stock before it runs out, accounting for lead time and demand.
A ratio that measures how many times a company's inventory is sold and replaced over a specific period, indicating sales efficiency and inventory management.
The process of ordering, storing, tracking, and controlling goods to ensure the right quantity is available at the right time while minimizing holding costs.
The coordination of all activities involved in sourcing, procurement, production, and delivery of products from raw materials to end customers.
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