Excess inventory & Stock outs are not acceptable in a manufacturing set up. A buyer gets a quantity discount when making a bulk purchase & unit purchase cost comes down. However, The Inventory Carrying Cost ( ICC) goes up. It is the cost of storing the purchased materials for future use.
We can analyse both above ordering cost & Inventory carrying cost and arrive at optimum quantity at which above costs are minimum. This quantity is called Economic Order Quantity ( EOQ) For that commodity.
