Economic order quantity (EOQ) calculator
Order too little at a time and ordering fees eat you alive; order too much and holding cost ties up your cash. EOQ is the classic formula for the order size that minimizes the combined cost of the two — the textbook starting point before you tune it to your own supplier terms.
What your result means
Your result is the order size that keeps your total ordering and holding costs as low as possible, plus how often you'd reorder at that size.
Ordering costs fall as orders get bigger, because you place fewer of them. Holding costs rise, because more stock sits on the shelf. EOQ is the point where the two balance out.
How the EOQ formula works
EOQ = √(2 × Annual demand × Cost per order ÷ Annual holding cost per unit)
- Annual demand
- units of this product you expect to sell in a year
- Cost per order
- fixed cost of placing and receiving one purchase order
- Annual holding cost per unit
- cost of keeping one unit in stock for a year
The calculator then shows how often you'd order:
Orders per year = Annual demand ÷ EOQ Days between orders = 365 ÷ Orders per year
If holding cost is zero, there's no penalty for ordering huge amounts, so the calculator shows "No cap".
Worked example
Worked exampleExample numbers
These match the calculator's default inputs.
| Input | Value |
|---|---|
| Annual demand | 1,000 units |
| Cost per order | $50 |
| Holding cost per unit per year | $2 |
- EOQ = √(2 × 1,000 × $50 ÷ $2) = √50,000 ≈ 224 units
- Orders per year = 1,000 ÷ 223.6 ≈ 4.5
- Days between orders = 365 ÷ 4.47 ≈ 82 days
At this order size, yearly ordering cost (4.47 × $50 ≈ $224) equals yearly holding cost (223.6 ÷ 2 × $2 ≈ $224), which is exactly where EOQ sits.
Limitations of EOQ
EOQ is a starting point, not a rule. It assumes:
- Steady demand. Seasonal or trending products need their order sizes adjusted through the year.
- No minimum order quantity. If a supplier's MOQ is higher than your EOQ, you'll have to order more. The guide to minimum order quantities covers how to negotiate them.
- No volume discounts. A price break at a larger order size can outweigh the extra holding cost. Compare the total cost at both sizes.
- A fixed lead time. EOQ sets how much to order; your reorder point sets when. The guide to inventory replenishment shows how the two fit together.
Use EOQ to sanity-check your current order sizes. If you're ordering far more often or far less often than it suggests, your costs are probably higher than they need to be.
Common mistakes with EOQ
- Putting per-unit costs into cost per order. Cost per order is only what you pay once per order: fixed freight charges, brokerage, admin. The product price itself doesn't belong there.
- Underestimating holding cost. Storage is only part of it. Include the cost of the cash tied up, insurance and the risk of the product going out of date.
- Using last year's demand for a growing or shrinking product. Use the demand you expect over the coming year.
- Ignoring lead time. EOQ doesn't account for how long orders take to arrive. Your lead time decides when each order has to be placed.
- Treating EOQ as exact. Total cost changes slowly near the EOQ, so rounding to a convenient case or pallet size costs very little. Small differences from EOQ don't matter; big ones do.
- Forgetting cash flow. Even if EOQ says a large order is cheapest over the year, you need the cash to pay for it up front.
FAQ
What is EOQ?
Economic order quantity is the order size that minimizes the total of two costs: the cost of placing orders and the cost of holding stock. Order more at a time and you place fewer orders but hold more inventory; order less and the reverse happens.
What counts as cost per order?
Everything that's charged or spent per purchase order rather than per unit: fixed freight or shipping charges, customs brokerage, receiving and inspection time, and admin. Per-unit costs like the product price don't belong here.
How do I estimate holding cost per unit?
Add up the yearly cost of keeping one unit in stock: the cost of the capital tied up in it, storage, insurance and shrinkage. Stores often estimate it as a percentage of the unit cost per year.
What if my supplier's minimum order is bigger than EOQ?
Then the minimum order quantity wins, and you'll hold more stock than is ideal. Compare the extra holding cost with the cost of switching suppliers or negotiating a lower minimum.