What is economic order quantity (EOQ) and how is it calculated?
Every purchase raises the same question: order a lot now, or a little more often? EOQ is the classic formula that balances the two costs behind it.
The two costs EOQ balances
- Ordering cost (S): what each order costs regardless of its size, such as preparing and approving it, receiving the goods and fixed delivery charges.
- Holding cost (H): what it costs to keep one unit in stock for a year: tied-up capital, storage, insurance, shrinkage and obsolescence, often estimated as a percentage of the unit cost.
Large, rare orders mean low ordering costs but high holding costs. Small, frequent orders do the opposite. EOQ is the point where the two are equal and their sum is lowest.
The formula
EOQ = √(2 × D × S ÷ H), where D is annual demand in units, S is the cost per order and H is the holding cost per unit per year. Keep the units consistent: if D is per year, H must be per year too.
A worked example (illustrative numbers)
An item sells 2,400 units a year. Each order costs 50 EUR to place and receive. The unit cost is 20 EUR and the holding cost is estimated at 20% a year, so H is 4 EUR.
- EOQ = √(2 × 2,400 × 50 ÷ 4) = √60,000 ≈ 245 units.
- That is about 10 orders a year, roughly one every five weeks.
- Yearly ordering cost ≈ 2,400 ÷ 245 × 50 ≈ 490 EUR; yearly holding cost ≈ 245 ÷ 2 × 4 = 490 EUR.
The total cost curve is flat around the optimum. Ordering 200 or 300 units gives a total of 1,000 EUR a year instead of about 980 EUR. That is why rounding EOQ to a full box, pallet or the supplier's minimum order quantity is usually fine.
Assumptions and limits
EOQ assumes steady demand, a fixed cost per order, a constant purchase price and delivery in one go. Real purchasing often breaks these assumptions:
- Volume discounts can make a larger order cheaper overall; compare total cost at each price break.
- Seasonal or erratic items need a forecast, not an annual average.
- Shelf life, storage space and cash can cap the quantity.
- EOQ answers how much to order, not when. The timing comes from the reorder point and safety stock.
How OrgLines fits
In OrgLines you can enter the cost price of a product, which is the basis for estimating the holding cost. The inventory list shows a recommended quantity to order for each item, and purchase orders are confirmed with the supplier and then received into stock. EOQ is a useful check on whether your usual order size is far from the balance point.