Economic order quantity (EOQ) calculator
The economic order quantity is the order size that makes the yearly cost of ordering plus the yearly cost of holding stock as low as possible. Enter your annual demand, the cost of placing one order and what it costs to hold one unit for a year.
The EOQ formula
EOQ = √( 2 × annual demand × cost per order ÷ holding cost per unit per year )
Ordering often in small amounts keeps little stock but pays the cost of an order many times. Ordering rarely in large amounts saves on orders but holds a lot of stock. EOQ is the point where the two yearly costs are equal and their total is lowest.
Holding cost per unit is the unit cost times your yearly holding rate. A rate of 15–30% of the stock’s value a year is a commonly quoted range, not a rule — use your own figures where you have them.
EOQ assumes steady demand and a fixed price. Supplier minimums, pack sizes and quantity discounts can move the best order size — round to what the supplier sells.
Worked example
A distributor sells 5,000 units a year. Each order costs 40 to place and receive. A unit costs 8 and holding it costs 25% a year, so H = 2 per unit.
EOQ = √(2 × 5,000 × 40 ÷ 2) = √200,000 ≈ 447 units. That is about 11 orders a year, one every 33 days, for a yearly ordering and holding cost of about 894.
How to use the result
Use it as the order size
Combine EOQ (how much) with the reorder point (when). Order about this quantity each time stock reaches the reorder point.
Round to supplier packs
If the supplier sells in cartons of 50, order 450 rather than 447; the total cost curve is flat near the optimum.
Re-run it when costs change
New freight costs, a cheaper warehouse or a change in demand all move EOQ. Check it at least once a year.
Questions and answers
The order size that minimises the combined yearly cost of placing orders and holding stock, for an item with steady demand.
EOQ = √(2DS/H), where D is annual demand, S the cost per order and H the holding cost of one unit for a year.
The cost of the money tied up, storage, insurance, shrinkage and the risk that the stock becomes obsolete.
For items with very uneven or seasonal demand, perishable goods, or when quantity discounts make larger orders cheaper per unit.
EOQ tells you how much to order; the reorder point tells you when. You need both.
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