What does Economic Order Quantity (EOQ) optimize?

• A. It balances transportation and insurance costs.
• B. It sets automatic reorder triggers.
• C. It minimizes stockouts.
• D. It minimizes total inventory costs by balancing ordering and holding costs.

Answer: (D)

EOQ is about reducing the total cost of keeping inventory by balancing two opposing cost streams: how much it costs to place orders and how much it costs to hold inventory. If you order in tiny, frequent batches, ordering costs pile up from placing many orders and processing them. If you order in large, infrequent batches, holding costs rise because more units sit in stock, tying up capital and incurring storage and risk costs. The EOQ calculation finds the order size that minimizes the sum of these two costs, giving you the lowest overall inventory expense under steady demand and constant costs. It isn’t about automatically triggering reorders, nor is it a guarantee against stockouts or solely about transportation or insurance costs—the method specifically targets minimizing total inventory costs by balancing ordering and holding costs.