Eoq Model

Economic Order Quantity (EOQ) is an inventory management formula that determines the optimal order size for an item with steady demand by minimizing the total of ordering and holding costs. The classic equation is EOQ = sqrt(2DS/H), where D is annual demand, S is fixed cost per order, and H is annual holding cost per unit.

In a manufacturing or warehouse environment, EOQ is used to set replenishment lot sizes for raw materials, packaging, and MRO items. The model is fed with annual usage, purchase-order processing cost, and carrying cost, producing a standard buy quantity for stable, predictable demand items. Planners use historical consumption records to calculate the formula, then convert the result into purchasing policy such as ordering a set number of coils, pallets, drums, or bins at a reorder point. This reduces total cost while maintaining production continuity. The model assumes constant demand, constant lead time, fixed ordering cost, and instantaneous receipt, so it works best for controlled, repetitive consumption rather than engineered-to-order materials. On the shop floor, it also prevents both too many small orders and excess stock, though supply chain teams typically pair EOQ with reorder points in ERP/MRP systems.