What does the Economic Order Quantity (EOQ) specifically minimize?

The Economic Order Quantity (EOQ) specifically minimizes total ordering and holding costs. This concept is crucial in inventory management as it seeks to determine the optimal order size that reduces the combined costs associated with ordering new inventory and the costs incurred for holding that inventory over time.

When a business orders too frequently, it incurs higher ordering costs due to the number of orders placed, regardless of order size. Conversely, ordering in large quantities might minimize the number of orders but increases holding costs related to storage, insurance, spoilage, and capital tied up in unsold inventory. By applying the EOQ model, an organization can identify the order quantity that strikes the best balance between these two cost types, leading to overall cost efficiency in inventory management.

Identifying the balance between these costs is crucial for effective inventory control, which supports better financial performance and resource allocation in operations.