Economic Order Quantity (EOQ)

Overview

EOQ determines the order quantity that minimizes total inventory cost = ordering cost + holding cost. Formula: EOQ = √(2DS/H) where D=annual demand, S=ordering cost per order, H=holding cost per unit per year. Assumes constant demand and instantaneous replenishment.

When to Use

Trigger conditions:

• Setting standard order quantities for inventory replenishment
• Balancing ordering frequency against warehousing costs
• Baseline calculation before applying safety stock adjustments

When NOT to use:

• When demand is highly uncertain (use newsvendor model)
• When products are perishable with short shelf life
• When quantity discounts change the cost structure significantly

Algorithm