Economic Order Quantity (EOQ)

EOQ is one of the very useful technique to maintain Inventory.
EOQ give the answer of 2 question :
1) what is order size?
2) At which level should be order?

First, understand what kind of cost are under inventory management. There are 3 kind of cost occur during maintain inventory, (1) Ordering cost (2) Carrying cost (3) Holding Cost.

The graphical representation.
 Formula of EOQ :
Annual Oder Cost = C x D/Q
Annual Carrying Cost = C" x Q/2

Total Cost = Annual Oder Cost + Annual Carrying
                     C x D/Q + C" x Q/2
(solve equation as take TC =0)
Q = (2DC/C")^(1/2)

In simple way, in graph we can see, the ordering cost is decreasing while we order large size of good but in other side when we order large size of good then carrying cost will be high. so here, EOQ help to finding out at which point, the lover ordering and carrying cost low.
EOQ also tell abut the Reorder Point:

as show in graph, red line show the order and reorder ling, when yr inventory comes in that like or we can say met the red line it's point call ordering point or reordering point. the time between order and receiving  is call lead time.
Formula :
Reordering Point = Lead time x Average usages