What is Economic Order Quantity?

EOQ balances two competing costs. Larger orders reduce how often the business places an order, but increase average stock held. Smaller orders reduce average cycle stock while increasing the number of replenishment events.

The basic model assumes steady known demand, a fixed cost per replenishment order, constant holding cost per unit and no stockouts. It also assumes replenishment arrives as a complete lot. Real supplier constraints can require a different choice.

How to interpret it

EOQ gives an order-size estimate, not a reorder date. The reorder point separately determines when replenishment should begin based on lead-time demand and any safety stock.

The lowest modeled cost is not necessarily the feasible purchase. Carton sizes, minimum order quantities, shelf life, storage limits and available cash can constrain the order. Evaluate practical neighboring quantities rather than treating the square-root output as an instruction.

Quantity discounts change the comparison because purchase cost is no longer constant across order sizes. A lower unit price can be outweighed by higher holding cost or excess stock exposure. The basic EOQ alone cannot decide that trade-off.

The model concerns expected cycle stock. Safety stock adds a separate buffer, and uncertainty may require a more suitable replenishment policy. An EOQ calculation using unreliable demand inputs can appear precise without being useful.

Common mistakes