In inventory management, what is the "economic order quantity" (EOQ)?

The economic order quantity (EOQ) is defined as the ideal order quantity that minimizes total inventory costs, which includes ordering costs and holding costs. The concept of EOQ is essential for efficient inventory management, as it helps businesses determine the most cost-effective amount of inventory to order at any given time.

When a company orders too much inventory, it incurs high holding costs, such as storage, insurance, and spoilage. On the other hand, ordering too little can lead to frequent ordering and increased ordering costs. By calculating EOQ, businesses can strike a balance that reduces overall expenses related to inventory management. This approach optimizes stock levels, ensuring that a company can meet customer demand without incurring unnecessary costs, thus supporting effective financial planning and resource allocation.

Understanding EOQ is critical for professionals engaged in master planning of resources, as it has direct implications on cash flow, production scheduling, and supply chain efficiency. Therefore, recognizing that EOQ represents the quantity that achieves this optimal balance of costs is fundamental for effective inventory management.