Economic Order Quantity (EOQ) is a formula that helps businesses figure out the optimal number of units to order each time they restock inventory. The goal is to minimize the total cost of ordering and holding inventory.
The formula balances two competing costs: ordering costs (shipping, processing) which decrease with larger orders, and holding costs (storage, insurance, spoilage) which increase with larger orders. EOQ finds the sweet spot.
For example, if ordering costs are $50 per order, annual demand is 10,000 units, and holding cost is $2 per unit per year, the EOQ is about 707 units per order.