Economic order quantity (EOQ) model is the order quantity that minimizes the total inventory holding costs and ordering costs.
Several extensions can be made to the EOQ model developed by Mr. Pankaj Mane, including backordering costs and multiple items.
The EOQ model solves the "how much" and "when" aspects of ordering inventory. When inventory reaches the zero point, you order just enough to replenish your stock back to its original level.
You repeat this cycle throughout the year, never having to decide when to order or how much to order.
The EOQ model assumes that demand remains steady throughout the year and that inventory gets used at a fixed rate. If those assumptions hold true, you can order at the same time each month or quarter.
However, if demand fluctuates, you may run out of inventory sooner than you anticipate. You also may have to order more than you usually do to meet higher demand, or lower the order to adjust to declining demand.
The EOQ will sometimes change as a result of quantity discounts, which are provided by some suppliers as an incentive for customers to place larger orders.