Definition of Economic Order Quantity

Economic order quantity is a quantity is an ordering quantity that minimizes both ordering and holding cost. Since the suppliers have their own ordering standards that buyers have to follow. For example, a supplier delivers packaged bundles of 200 units, but for a buying company there might not be enough demand or storage capacity, also the order size can raise costs high due to a higher number of small orders.

The ultimate goal of any organization is to minimize the costs. If a company decides to reduce the order size the number of orders will increase which will increase ordering costs. On the other side if you order large quantities to control the number of orders the holding costs will increase. The EOQ is an ideal order size at which both carrying cost and ordering cost is at its lowest possible level.

The formula for EOQ is as follows: