The optimal order quantity that minimizes the total costs associated with inventory management, including holding costs, ordering costs, and potential shortage costs. This mathematical formula balances the trade-off between carrying too much inventory (which increases storage and capital costs) and ordering too frequently (which increases administrative and shipping expenses).
EOQ is crucial for warehouse operations because it directly impacts storage space utilization, cash flow, and operational efficiency. By determining the ideal order size, warehouse managers can optimize inventory turnover while avoiding stockouts that disrupt fulfillment operations. Modern WMS platforms automatically calculate EOQ using historical demand data, lead times, and cost parameters.
For example, if a warehouse stocks a popular item with consistent monthly demand of 1,000 units, EOQ analysis might determine that ordering 500 units every two weeks minimizes total costs compared to ordering 2,000 units monthly or 250 units weekly.
