What is Economic Lot Size?

Economic lot size is the quantity at which ordering and inventory carrying costs are minimized for a group of inventory items. Inventory carrying costs must be balanced against purchasing costs, since these costs are contradictory; purchasing costs increase as the unit volume purchased within each order declines, while inventory holding costs increase as the number of units purchased per order increases.

The inputs to the economic lot size model include direct cost, setup cost, and carrying cost. Direct cost includes the cost of the materials and labor required to manufacture a product, while setup cost includes the cost to prepare a machine for the production of a batch. Carrying cost is the cost incurred to store a product for the average amount of time that it will be in storage.