economic order quantity

Essentially its the optimal quantity in economic terms to order for an organisation given the opposing forces of ordering costs and holding costs. If an oganisation made large orders of stock this would be costly in terms of holding costs such as the financial cost of holding stock and other associated costs such as the need for a greater level of insurance cover etc. .However, larger orders would mean fewer orders would need to be made for a given level of demand.This means ordering costs ould be lower. Ordering costs will involve the administration costs associated with purchasing and processing an order as well as the costs involved with handling each delivery of each order of stock.The economic order quantity equation seeks to find an optimal point in terms of quantity ordered which minimises cost given the opposing forces of holding cost of holding stock and ordering cost associated with ordering stock.Of course in reality other factors might have to be taken into account and estimating the costs of holding stock and ordering stock exactly may prove to be impossible but it gives a good starting point when considering these types of situation.