Which cost component is minimized by the EOQ model?

• A. Ordering Costs
• B. Holding Costs
• C. Stockouts
• D. Total Inventory Costs

Answer: (D)

The main idea behind the EOQ model is to minimize total annual inventory costs by balancing two opposing costs: ordering costs and holding costs. Ordering more frequently lowers how much inventory you keep on hand but raises the number of orders (and hence ordering costs). Ordering in larger lots reduces the number of orders but increases the amount of inventory tied up (holding costs). The EOQ quantity is the point where the sum of these two costs is smallest, so the model minimizes total inventory costs. In the basic EOQ setup, stockout costs aren’t included, so the focus is on minimizing the total of ordering and holding costs.