Supply Chain

Economic Order QuantityEOQ

The order quantity that minimizes the combined cost of ordering and holding inventory.

The Economic Order Quantity (EOQ) is the classic inventory formula that balances two opposing costs: ordering/setup cost (favoring large, infrequent orders) and holding cost (favoring small, frequent ones). The optimum is the square-root trade-off between them.

EOQ is the purchasing analogue of batch sizing in production. Lean challenges its assumptions by attacking the setup/ordering cost directly through SMED, which shrinks the economic lot toward one.

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Related Terms
Batch Size
The number of units produced between changeovers — smaller batches cut lead time and WIP but require more setups.
Reorder Point
The inventory level at which a replenishment order should be placed to avoid a stockout during the lead time.
Safety Stock
Extra inventory held as a buffer against demand and supply variability to protect service level.
Inventory
Raw materials, work-in-process, and finished goods held in the system — one of the eight wastes when excessive.
ABC Analysis
An inventory categorization that ranks items into A, B, and C classes by value so control effort is focused where it matters.

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