Economic order quantity

The economic order quantity (EOQ) is a formula that derives the optimum quantity of goods to order, so that several costs related to inventory are minimized. These costs are inventory ordering costs, holding costs, and stock out costs. The formula incorporates the following factors:

  • Setup costs
  • Rate of demand
  • Production costs
  • Interest rate

The formula is most useful when standardizing the reordering of components on a repetitive basis. The formula can be inserted into a materials management system, so that the system automatically places replenishment orders with suppliers. The formula is least useful in lean production environments, where only the exact amount of components needed for the current production requirements are kept on hand; all other requirements are ordered on a just-in-time basis.