What is the significance of the EOQ?

What is the significance of the EOQ?
EOQ is Economic Order Quantity. It represents the optimum quantity of materials or inventory items to purchase each time.

The quantity to order will be driven by several factors such as: price per unit, volume discount available from the suppliers, rate at which the units are used by the purchaser, lead time from purchase to delivery / frequency of purchasing, availability from supplier / seasonality of supply, purchaser's liquidity, purchaser's storage ability, purchaser's carrying costs per unit, purchasing cost per unit (what it costs to place an order, receive the goods and process and pay the supplier), perishability and obsolescence factors. There could be others but these cover most.

Take a simple example: Brown's Furniture produces one type of chair. A component of the chair is glue which comes in jars. Brown's uses 5 jars of glue per week and the cost to place and process the order through to invoice payment is $10. The price to purchase a jar of glue is $20 per jar for up to 19 jars per order and $15 per jar for quantities above 19 per order.

If Brown's purchases one jar every day, the cost is $20 for the jar plus order placement costs of $10 = $30 total cost per jar

If Brown's purchases 5 jars once per week, the cost is $20 for each jar plus order placement costs of ($10/5=)$2 = $22 total cost per jar

If Brown's purchases 20 jars every 4 weeks, the cost is $15 for each jar (volume step pricing advantage) plus order placement costs of ($10/20=)$0.50 = $15.50 total cost per jar

In this example, the EOQ is 20 jars each time.

Consider though the implications if each jar had a shelf life after purchase of only 2 weeks. EOQ would then become 10 units even at the $20 per unit price because if Brown's purchased 4 weeks' supply (20 jars), 10 jars would be useless after 2 weeks and would have to be thrown out.

There are a number of EOQ calculators on the web but typically are too simplistic. They are OK for answering exam and study questions which are simply based on formulae but they don't handle qualitative issues such as the shelf life of the glue in the above example.