What does the Economic Order Quantity (EOQ) model aim to minimize?

The Economic Order Quantity (EOQ) model is specifically designed to determine the optimal order quantity that minimizes the total costs associated with ordering and holding inventory. The primary focus of the EOQ model is to find the balance between the costs incurred when placing orders (ordering costs) and the costs associated with storing inventory (holding costs).

When an organization takes too few orders, it incurs higher ordering costs because it needs to place orders more frequently, while having too much inventory leads to increased holding costs due to the expenses associated with storage, insurance, and depreciation. The EOQ model seeks to identify the quantity that minimizes the sum of these two cost components, enabling businesses to operate efficiently by maintaining ideal inventory levels while minimizing overall costs.

While minimizing storage space costs or addressing production delays and shipping costs are important considerations in supply chain management, they are not the primary objectives of the EOQ model. The focus remains squarely on the interplay between ordering and holding costs.