Economic Order Quantity (EOQ)
Definition
The order size that minimises the combined cost of ordering and holding inventory. Ordering in EOQ-sized batches balances the cost of frequent small orders against the cost of carrying large stocks.
Related Terms in Purchasing & Inventory
Reorder Point
The inventory level at which a new order should be placed to avoid running out before the replenishment arrives. It is based on demand during the supplier lead time plus any safety stock.
Safety Stock
Extra inventory held as a buffer against uncertainty in demand or supplier lead time, reducing the risk of stockouts. Holding it costs money, so the level is a trade-off against service.
Lead Time
The time between placing an order with a supplier and receiving the goods. Longer or more variable lead times require higher safety stock to maintain the same service level.
Inventory Carrying Cost
The total cost of holding inventory over time, including storage, insurance, obsolescence, spoilage and the capital tied up. It is a key input to order-quantity and stocking decisions.
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