ECONOMIC ORDER QUANTITY (EOQ) MODEL: Inventory Man... https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoq...

SCRC Article Library: ECONOMIC ORDER

QUANTITY (EOQ) MODEL: Inventory Management
Models : A Tutorial

ECONOMIC ORDER QUANTITY (EOQ) MODEL: Inventory Management Models : A Tutorial

Published on: Jan, 28, 2011

by: Cecil Bozarth, Ph.D.

ECONOMIC ORDER QUANTITY (EOQ) MODEL

The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the
year. Even if all the assumptions dont hold exactly, the EOQ gives us a good indication of whether or not current
order quantities are reasonable.

What is the EOQ Model? (#1)

What Would Holding and Ordering Costs Look Like for the Years? (#2)
Total Relevant* Cost (TRC) (#3)
Economic Order Quantity (EOQ) (#4)
EOQ Formula (#5)
Same Problem (#6)

What is the EOQ Model?

Cost Minimizing Q
Assumptions:
Relatively uniform & known demand rate
Fixed item cost
Fixed ordering and holding cost

Constant lead time

(Of course, these assumptions dont always hold, but the model is pretty robust in practice.)

What Would Holding and Ordering Costs Look Like for the Years?

A = Demand for the year

Cp = Cost to place a single order

Ch = Cost to hold one unit inventory for a year

Total Relevant* Cost (TRC)

Yearly Holding Cost + Yearly Ordering Cost

* Relevant because they are affected by the order quantity Q

1 of 3 09-Oct-17, 1:18 AM
ECONOMIC ORDER QUANTITY (EOQ) MODEL: Inventory Man... https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoq...

Economic Order Quantity (EOQ)

EOQ Formula

Same Problem

Pam runs a mail-order business for gym equipment.

Annual demand for the TricoFlexers is 16,000. The
annual holding cost per unit is $2.50 and the cost to
place an order is $50. What is the economic order
quantity?

Categories:

SCM Topics (https://scm.ncsu.edu/scm-articles/all-

articles/category/scm-topics) Inventory Management Supply Chain
(https://scm.ncsu.edu/scm-articles/all-articles/category/inventory-management-supply-
chain) SCM Tutorials (https://scm.ncsu.edu/scm-articles/all-articles/category/scm-
tutorials) Inventory Management (https://scm.ncsu.edu/scm-articles/all-articles
/category/inventory-management)

Read the Supply Chain Management Professional Newsletter

Read the latest supply chain research, articles,

and news as soon as we post them.

Privacy Policy (http://www.ncsu.edu/privacy/)

Related Articles

Introduction: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles/article/introduction-

inventory-management-models-a-tutorial)
INDEPENDENT VS DEPENDENT DEMAND INVENTORY SYSTEMS - An EXAMPLE: Inventory
Management Models Tutorial (https://scm.ncsu.edu/scm-articles/article/independent-vs-dependent-demand-
inventory-systems-an-example-inventory-mana)
FUNCTIONS AND DRIVERS OF INVENTORY: Inventory Management Models : A Tutorial
(https://scm.ncsu.edu/scm-articles/article/functions-and-drivers-of-inventory-inventory-management-models-a-tutorial)
PERIODIC REVIEW SYSTEM: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles
/article/periodic-review-system-inventory-management-models-a-tutorial)
PERPETUAL SYSTEM: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles/article
/perpetual-system-inventory-management-models-a-tutorial)
SAFETY STOCK ANALYSIS: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles
/article/safety-stock-analysis-inventory-management-models-a-tutorial)
REORDER POINT FORMULA: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles
/article/reorder-point-formulainventory-management-models-a-tutorial)
REFERENCES: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles/article/references-
inventory-management-models-a-tutorial)
SUMMARY: Inventory Management Models : A Tutorial (https://scm.ncsu.edu/scm-articles/article/summary-
inventory-management-models-a-tutorial)

Popular Articles

E-Procurement and the Purchasing Process (https://scm.ncsu.edu/scm-articles/article/e-procurement-and-the-

purchasing-process)
Role of Procurement within an Organization: Procurement : A Tutorial (https://scm.ncsu.edu/scm-articles/article

2 of 3 09-Oct-17, 1:18 AM
ECONOMIC ORDER QUANTITY (EOQ) MODEL: Inventory Man... https://scm.ncsu.edu/scm-articles/article/economic-order-quantity-eoq...

/role-of-procurement-within-an-organization-procurement-a-tutorial)
The Procurement Process - Creating a Sourcing Plan: Procurement : A Tutorial (https://scm.ncsu.edu/scm-
articles/article/the-procurement-process-creating-a-sourcing-plan-procurement-a-tutorial)
The Procurement Process - e-Procurement: Procurement : A Tutorial (https://scm.ncsu.edu/scm-articles/article
/the-procurement-process-e-procurement-procurement-a-tutorial)
Introduction: Collaborative Planning, Forecasting and Replenishment (CPFR): A Tutorial
(https://scm.ncsu.edu/scm-articles/article/introduction-collaborative-planning-forecasting-and-replenishment-cpfr-a-tu)
What is Supply Chain Management (SCM)? (https://scm.ncsu.edu/scm-articles/article/what-is-supply-chain-
management)

3 of 3 09-Oct-17, 1:18 AM