EOQ: Economic Order Quantity

When we know about the challenges faced by an inventory controller or manager, we know that he/she has to face conflicting pressures to keep inventories low enough to avoid excess inventory holding costs but high enough to reduce the frequency of orders and setups

In order to balance these conflicting pressures and determining the best cycle inventory level for an item, we have to find the EOQ (Economic Order Quantity), which minimizes the annual handling costs as well as ordering costs. But yet again, we have to make certain assumptions in this imperfect world to calculate a deadly accurate economic order quantity.

Those assumptions are as follows:

1- Demand rate being constant and known with certainity
2- We do not have to limit lot sizes due to transportation capacity problems
3- Only, inventory holding costs and setup costs are incorporated in calculations.
4- Items don't really have to be interdependent. Which means if more than 1 item is ordered, no additional benefit is obtained while ordering to the same supplier.
5- There is no uncertainty in lead time.

I personally think that very few real world scenarios offer above 5 assumptions. Therefore, EOQ may be taken as very first step in approximation of lot sizes, even when any one or two of the above assumptions don't really apply.