How it works
The economic order quantity is the order size that balances two opposing costs: ordering often (more order and shipping costs) versus ordering in bulk (more money and space tied up holding stock).
At the EOQ, annual ordering cost equals annual holding cost, and their total is as low as it can be. The table shows that total cost is fairly flat near the EOQ, so rounding to a convenient case or pallet size costs little.
The classic model assumes steady demand, a fixed cost per order and no quantity discounts. Add safety stock separately to protect against demand and lead-time swings.
Formula
EOQ = √(2 × D × S ÷ H), where D is annual demand, S the cost per order and H the holding cost per unit per year.
Questions people ask
How do I estimate holding cost?
Add up the yearly cost of storing inventory (warehouse space, insurance, shrinkage, obsolescence and the cost of capital) and divide by average units held. Many businesses estimate it at 20–30% of unit cost per year.
What does EOQ not account for?
Volume discounts, demand that changes over the year, lead times and stockout costs. It answers "how much per order", not "when to reorder"; the reorder point covers timing.
What is the reorder point?
Daily demand × lead time in days, plus any safety stock. When inventory falls to that level, place an order for the EOQ.