economic order quantity (EOQ)

Definition:
A mathematical means of determining the optimum order size for items or materials in regular use, based on the equation of INVENTORY holding costs with the costs of ordering - and hence their collective minimization. The basic formula may be expressed thus: EOQ = (2AS/CI) where: A is the total demand for the standard time period (usually taken as one year); S is the cost of ordering (or set up costs); C is the unit cost (or price) of the item; I is the cost of holding inventory, as a percentage of the unit cost. The main limitations of the technique are that it is based on the following presumptions: that opening and closing STOCK levels should be the same; that there is a regular and constant usage pattern of the item; that there are no changes in price or lead time; that suppliers are able to deliver in precise quantities; and that there is an absence of deterioration and obsolescence. Several refinements of the formula exist to take into account price variations (quantity discounts) and phased or partial deliveries. Use of EOQ-based routines is generally limited to class A, and perhaps class B categories of inventory.

Cross-References:
[ABC analysis] [stock] [inventory]

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