Economic Order Quantity
Definition
The order size that minimizes the combined cost of ordering and holding inventory. EOQ balances the fixed cost of placing orders against the cost of carrying stock.
In Practice
EOQ comes from a simple trade-off: order in large batches and you pay less in ordering and setup costs but more in holding costs; order small and frequent and the reverse is true. The formula, the square root of (2 x annual demand x ordering cost / holding cost per unit), finds the quantity where the two cost curves cross.
Planners rarely order the exact EOQ, but it is an excellent anchor. It exposes when lot sizes are driven by habit or supplier minimums rather than economics, and it quantifies the cost of deviating, for example when rounding up to a full pallet or container.
Example: an item with 12,000 units of annual demand, a 50 dollar cost per order, and a 3 dollar annual holding cost per unit gives an EOQ of about 632 units, so the buyer standardizes on orders of 630 units roughly every 19 days.
Related Calculators
Related Terms
The fixed cost incurred each time an order is placed, independent of order size, covering activities like purchase order processing, receiving, inspection, and invoice handling. In manufacturing, the equivalent is setup cost.
Holding CostThe cost of storing one unit of inventory for a defined period, commonly expressed in dollars per unit per year. It is the per-unit form of inventory carrying cost used in lot-sizing formulas.
Reorder QuantityThe number of units ordered when a replenishment is triggered. It may be a fixed lot size such as the EOQ, or a variable amount calculated to reach a target stock level.
Cycle StockThe portion of inventory that is consumed and replenished through normal ordering cycles. It is the working stock that satisfies expected demand between replenishments.