Economic Order Quantity (EOQ) is a formula in inventory management that calculates the ideal order quantity to minimize holding and ordering costs. It aims to strike a balance between excessive inventory costs and stockouts. EOQ considers three key factors: the demand rate, ordering cost, and holding cost.
By finding the optimal order quantity, a company can reduce holding costs (costs associated with storing excess inventory) and ordering costs (costs associated with placing orders) while ensuring adequate stock levels to meet demand. EOQ assumes a constant demand rate and does not consider factors like lead time variability or quantity discounts. Despite its limitations, EOQ remains a useful tool for businesses to optimize inventory management and enhance overall operational efficiency.