Definition
The economic order quantity (EOQ) is the order size that minimises the combined cost of placing orders and holding stock for an item with steady demand. It equals the square root of two times annual demand times the cost per order, divided by the annual holding cost of one unit. At the EOQ, yearly ordering and holding costs are equal.
How it works
Ordering costs (purchase processing, delivery, receiving) fall as orders get larger, while holding costs (storage, insurance, capital tied up, spoilage) rise. EOQ finds the balance point. It assumes constant demand, a fixed cost per order, a constant unit price and instant replenishment, so treat it as a starting point and adjust for quantity discounts, minimum order sizes and lead times.
Combine EOQ with a reorder point (daily demand times lead time, plus safety stock) to decide when to order. Ledgeriano's inventory module provides a reorder list and material requirements planning that suggests reorder quantities; the EOQ calculator helps you set the quantity itself.
Formula
EOQ = √(2 × D × S / H)
Orders per year = D / EOQ
Total annual cost = (D / Q) × S + (Q / 2) × H
Example: ordering printer paper boxes
A distributor sells 2,400 boxes a year (D). Each order costs 50 to place and receive (S), and holding one box for a year costs 6 (H). EOQ = √(2 × 2,400 × 50 / 6) = 200 boxes. The distributor places 12 orders a year, and annual ordering and holding costs are 600 each, 1,200 in total.