What does the term "economic order quantity" (EOQ) signify in inventory management?

The term "economic order quantity" (EOQ) refers to the optimal order quantity that a company should purchase to minimize total inventory costs. This encompasses a balance between various costs, including ordering costs (expenses associated with placing and receiving orders) and holding costs (costs related to storing unsold goods). By calculating EOQ, businesses can determine the most cost-effective amount to order, thereby enhancing inventory efficiency and reducing excess spending.

Minimizing total inventory costs is critical in inventory management, as it directly affects overall operational efficiency and profitability. By ordering the EOQ, companies can avoid overstocking or stockouts, thus ensuring a smooth supply chain operation and better cash flow management. This approach helps maintain adequate inventory levels while simultaneously minimizing unnecessary costs.