Economic Order Quantity

Economic Order Quantity (EOQ) is an inventory planning and managing measurement used in Operations, Supply Chain, and Logistics departments within business and organizations. It represents the optimum quantity of an item to be purchased per order to minimize the combined ordering and holding costs. It helps to determine the frequency of orders required to satisfy a given annual demand.

Variables

• Q: optimal order quantity
• D: annual quantity demanded
• S: ordering cost (fixed cost)
• H: holding cost per unit (variable cost)
• i: carrying cost (interest rate)
• C: unit cost (variable cost)
• b: shortage penalty cost per unit (variable cost)*
• ss: safety stock_*_

*May or may not be considered.

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