Economic Order Quantity

The Economic Order Quantity [EOQ] is a formula used in stock level control to calculate that quantity of stock to be purchased to replenish stock levels that minimises the sum of ordering costs and carrying costs. A number of variables are incorporated in an arithmetic formula that trades off the cost of carrying inventory and the cost of ordering. While some estimates place the cost of raising a purchase order at $100 or more, replenishment of stock items will probably involve raising a transaction on an existing supplier on pre-agreed terms, so the cost of raising an order is likely to be less than for a novel category. Assumptions built into the model include constant demand, fixed lead times and delivery in full, few of which are experienced in most situations. See also Reorder Level and Stock.