Economic order quantity

- What's the perfect amount of inventory to order? Many people will say it's the order that results in the lowest total inventory cost. Well, that's the definition of the economic order quantity, or EOQ. The goal of EOQ is to balance the cost of placing inventory orders with the cost of holding the inventory. For example, you made a forecast so you know how many items you will need for the year, but you need to determine how many orders to place this year and how much to order each time. Every time you place an order, there's a cost, the cost to negotiate a contract, place that contract and receive the material. So you can save money by placing fewer orders throughout the year. But if you do this, each order will be for a large amount of inventory, more than you need at that time, and you will have to pay extra costs to hold that extra inventory until you need it. That's where EOQ comes in. The economic order…