EOQ
EOQ (Economic Order Quantity) is the order size that minimises the total of two opposing costs: the cost of placing orders (which falls as you order in bigger batches) and the cost of holding inventory (which rises with bigger batches). The EOQ is the sweet spot where the two are balanced.
It is a classic inventory formula that underpins replenishment policy. While real-world constraints (MOQs, discounts, shelf life) adjust it, EOQ gives the baseline economic order size.
With annual demand D = 10,000 units, ordering cost S = $50, and holding cost H = $2/unit/year: EOQ = √((2 × 10,000 × 50) ÷ 2) = √500,000 ≈ 707 units per order.
What does EOQ optimise?
The total of ordering cost and holding cost. Order too often and ordering costs dominate; order too much at once and holding costs dominate — EOQ finds the minimum-cost middle.