What Is Economic Order Quantity (EOQ)?
Also known as: EOQ, EOQ formula, Optimal Order Quantity
Definition
Economic order quantity (EOQ) is the order size that minimizes the sum of ordering cost and inventory holding cost for an item with steady demand. The formula is the square root of (2 x annual demand x cost per order / annual holding cost per unit).
Economic Order Quantity (EOQ) Explained
EOQ balances two opposing costs. Ordering cost (setup, purchasing effort, receiving) falls as order size rises, while holding cost (capital, storage, insurance, shrinkage) rises with it. Total cost is lowest where the two are equal, which gives the square root formula: EOQ = sqrt(2DS / H), with D annual demand, S cost per order or setup, and H annual holding cost per unit.
The model assumes constant demand, fixed ordering cost, no quantity discounts and instantaneous replenishment. Real demand is lumpy and prices have breaks, so EOQ is a starting point. It is a flat optimum: ordering 20 percent more or less than EOQ changes total cost by only a few percent, so rounding to supplier pack sizes, container loads or full pallets costs little.
In ERPs EOQ shows up as a lot sizing rule. Infor SyteLine item planning parameters include a lot size policy with fixed order quantity, minimum and multiple settings, where an EOQ result is typically loaded as the order quantity. NetSuite uses the item's reorder multiple and preferred stock level fields, and Infor LN has order policy and economic order quantity fields on item ordering data. Planned orders from MRP then respect that value, combined with minimum order and order multiple constraints.
Use EOQ for stable, purchased, independent-demand items. Do not use it for make-to-order components driven by lumpy dependent demand from a master schedule, where lot-for-lot or period order quantity logic usually works better. Recompute the inputs at least annually, since carrying rates and setup costs drift.
Why It Matters
- It gives a defensible order quantity instead of buying whatever the buyer is used to or what the supplier suggests.
- Correct lot sizes cut both purchasing transactions and excess stock without hurting service.
- EOQ inputs expose the real cost of ordering and holding, which many companies have never calculated.
- ERP planned orders inherit the value, so a wrong EOQ repeats the same error thousands of times.
In Practice
Example: annual demand 12,000 units, cost per order 60, holding cost 2.40 per unit per year. EOQ = sqrt(2 x 12,000 x 60 / 2.40) = sqrt(600,000), about 775 units, or roughly 15 orders a year. If the supplier ships in cartons of 100, order 800.
Frequently Asked Questions
What is the EOQ formula?
EOQ equals the square root of (2 x annual demand x cost per order, divided by annual holding cost per unit).
What are the limits of EOQ?
It assumes steady demand, constant costs, no quantity discounts and instant replenishment. Lumpy dependent demand and price breaks need other lot sizing rules.
What is the difference between EOQ and reorder point?
EOQ answers how much to order. Reorder point answers when to order, based on demand during lead time plus safety stock. They are used together.
How does EOQ work with MRP?
MRP can use EOQ as a fixed order quantity lot size rule for independent-demand purchased items, and combine it with minimum order and multiple settings when creating planned orders.
Related Terms
Lot Sizing
Lot sizing is the ERP rule that determines how much to order or produce in each replenishment, converting net requirements into order quantities by balancing setup or ordering cost against inventory carrying cost.
Reorder Point
A reorder point is the inventory level at which a replenishment order is triggered. It equals expected demand during the replenishment lead time plus safety stock, so stock on hand covers usage until the new supply arrives.
Safety Stock
Safety stock is buffer inventory carried above expected demand to protect against variability in demand and supply during replenishment lead time. In ERP it is netted out of available inventory so MRP plans replenishment before the buffer is consumed.
MRP (Material Requirements Planning)
MRP (Material Requirements Planning) is the ERP calculation that explodes demand through bills of materials, nets it against on-hand and on-order inventory, and offsets by lead time to produce timed purchase and work order suggestions.
Inventory Turnover
Inventory turnover is the number of times a company sells and replaces its inventory in a period, calculated as cost of goods sold divided by average inventory value. Higher turns mean less cash tied up in stock.
Go Deeper
Economic Order Quantity (EOQ) Calculator
Compute the order quantity that minimizes combined ordering and holding cost, with orders per year and total annual cost at the optimum.
Free ToolReorder Point Calculator
Calculate the reorder point that triggers replenishment at the right moment, including review period coverage, and see the inventory value your ordering policy carries.
Free ToolInventory Carrying Cost Calculator
Build your true annual carrying cost from capital, storage, insurance, and obsolescence components - and see what an inventory reduction target is worth.
AI Inventory Optimization for Manufacturers
AI inventory optimization for manufacturers: cut stock 15-30% while raising service levels, with ML-driven safety stock and reorder policies inside your ERP.
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