Economic Order Quantity - EOQ

AAA

DEFINITION of 'Economic Order Quantity - EOQ'

An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:

 

Economic Order Quantity (EOQ)

where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

VIDEO

Loading the player...

BREAKING DOWN 'Economic Order Quantity - EOQ'

The EOQ formula can be modified to determine production levels or order interval lengths, and is used by large corporations around the world, especially those with large supply chains and high variable costs per unit of production.

Despite the equation's relative simplicity by today's standards, it is still a core algorithm in the software packages that are sold to the largest companies in the world.

RELATED TERMS
  1. Materials Requirement Planning ...

    One of the first software based integrated information systems ...
  2. Enterprise Resource Planning - ...

    A process by which a company (often a manufacturer) manages and ...
  3. Variable Cost

    A corporate expense that varies with production output. Variable ...
  4. Inventory

    The raw materials, work-in-process goods and completely finished ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at ...
  6. Supply Chain

    The network created amongst different companies producing, handling ...
Related Articles
  1. Economics

    Understanding Economic Order Quantity

    Economic order quantity is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory.
  2. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  3. Investing Basics

    The Working Capital Position

    Learn how to correctly analyze a company's liquidity and beat the average investor.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  5. Term

    What are Mutually Exclusive Events?

    In statistics, mutually exclusive situations involve the occurrence of one event that does not influence or cause another event.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  9. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  10. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
RELATED FAQS
  1. How is the economic order quantity model used in inventory management?

    The economic order quantity model is used in inventory management by calculating the number of units a company should add ... Read Full Answer >>
  2. How does economic order quantity assist a company with maximizing profits?

    Economic order quantity can assist a company in maximizing profits because it finds the number of units the company should ... Read Full Answer >>
  3. How can Economic Order Quantity be used to lower inventory costs?

    Economic order quantity determines the optimal number of units a company should hold in its inventory. It determines the ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  6. What types of assets lower portfolio variance?

    Assets that have a negative correlation with each other reduce portfolio variance. Variance is one measure of the volatility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!