Which concept is used to determine the optimal order quantity to minimize total inventory costs?

Which concept is used to determine the optimal order quantity to minimize total inventory costs?

• A. Economic Order Quantity
• B. Just-In-Time
• C. Safety Stock
• D. Reorder Point

Answer: (A)

Balancing costs to find the best order size is the essence of this concept. Economic Order Quantity looks for the quantity that minimizes the sum of two main annual costs: the cost of placing orders (which goes down when you order larger quantities but fewer times) and the cost of holding inventory (which goes up when you keep more units on hand). By choosing an order size that trades off these costs, you minimize total inventory costs over time. The standard form uses D for annual demand, S for the fixed cost per order, and H for the annual holding cost per unit. The optimal order quantity is proportional to the square root of (2DS/H). Intuitively, if demand or the cost per order rises, you should order more each time; if holding costs rise, you should order smaller, more frequent lots. Other concepts mentioned—Just-In-Time aims to reduce inventory overall rather than determine an optimal order size; safety stock adds extra inventory to guard against variability; and reorder point signals when to place an order based on lead time and demand, rather than how much to order. The one that directly determines the quantity to minimize total costs is the Economic Order Quantity.

Balancing costs to find the best order size is the essence of this concept. Economic Order Quantity looks for the quantity that minimizes the sum of two main annual costs: the cost of placing orders (which goes down when you order larger quantities but fewer times) and the cost of holding inventory (which goes up when you keep more units on hand). By choosing an order size that trades off these costs, you minimize total inventory costs over time.

The standard form uses D for annual demand, S for the fixed cost per order, and H for the annual holding cost per unit. The optimal order quantity is proportional to the square root of (2DS/H). Intuitively, if demand or the cost per order rises, you should order more each time; if holding costs rise, you should order smaller, more frequent lots.

Other concepts mentioned—Just-In-Time aims to reduce inventory overall rather than determine an optimal order size; safety stock adds extra inventory to guard against variability; and reorder point signals when to place an order based on lead time and demand, rather than how much to order. The one that directly determines the quantity to minimize total costs is the Economic Order Quantity.