What is an 'Economic Order Quantity - EOQ'

Economic order quantity (EOQ) is an equation for inventory that determines the ideal
order quantity a company should purchase for its inventory given a set cost of
production, demand rate and other variables. This is done to minimize variable
inventory costs, and the formula takes into account storage, or holding, costs, ordering
costs and shortage costs. The full equation is as follows:

where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)
In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the
total holding costs and ordering costs. It is one of the oldest classical production scheduling models.
The model was developed by Ford W. Harris in 1913,[1] but R. H. Wilson, a consultant who applied it
extensively, and K. Andler are given credit for their in-depth analysis.[2]