⚡ Quick answer
Use the EOQ formula to find the optimal order size that minimizes total inventory costs: EOQ = √(2 × annual demand × order cost ÷ holding cost per unit per year).
Economic Order Quantity (EOQ)
Optimal order size minimizing ordering plus holding costs (classic square-root model).
📖 What it is
The Economic Order Quantity (EOQ) calculator helps businesses determine the optimal order size that minimizes the total costs of ordering and holding inventory. By applying this classic square-root model, companies can reduce waste and improve cash flow.
To use the EOQ calculator, you need to input your annual demand, order cost, and holding cost per unit per year. The output will provide you with the most cost-effective quantity to order, allowing for efficient inventory management.
It’s important to remember that this model assumes constant demand and costs, and it may not be suitable if you experience frequent stockouts or have fluctuating demand. Additionally, make sure to use annual figures for demand to avoid inaccuracies.
How to use
- Identify your annual demand for the product.
- Determine the cost of placing an order.
- Calculate the holding cost per unit per year.
- Plug these values into the EOQ formula.
- Calculate the square root to find the EOQ.
📐 Formulas
- EOQ Formula—EOQ = √(2 × annual demand × order cost ÷ holding cost per unit per year)
- Total Cost Calculation—Total Cost = (Order Cost × (Annual Demand ÷ EOQ)) + (Holding Cost × (EOQ ÷ 2))
💡 Example
For an annual demand of 10,000 units,
Order cost is $50,
and holding cost is $2 per unit per year,
The EOQ is calculated as follows:
EOQ ≈ √(2 × 10,000 × 50 ÷ 2) ≈ 707 units.
Real-life examples
Example for Electronics Retailer
An electronics retailer has an annual demand of 20,000 units, an order cost of $100, and a holding cost of $5 per unit. EOQ ≈ √(2 × 20000 × 100 ÷ 5) ≈ 400 units.
Example for Grocery Store
A grocery store has an annual demand of 15,000 units, an order cost of $30, and a holding cost of $1 per unit. EOQ ≈ √(2 × 15000 × 30 ÷ 1) ≈ 300 units.
Scenario comparison
- High Demand vs Low Demand—High demand results in a larger EOQ, reducing order frequency but increasing holding costs, while low demand leads to smaller orders with potentially higher order frequency.
- High Order Cost vs Low Order Cost—Higher order costs lead to a larger EOQ to minimize frequent ordering, whereas lower order costs allow for smaller, more frequent orders.
Common use cases
- Retail inventory management
- Manufacturing supply chain optimization
- E-commerce stock replenishment
- Warehouse management
- Food and beverage distribution
- Pharmaceutical inventory control
- Seasonal product ordering
- Home-based business stock management
How it works
The EOQ formula calculates the optimal number of units to order, balancing the costs associated with placing orders and holding inventory. By using this formula, businesses can minimize their total inventory costs effectively.
What it checks
This tool checks for the optimal order size that minimizes both ordering and holding costs in inventory management.
Signals & criteria
- Annual demand
- Order cost
- Holding cost
Typical errors to avoid
- Using monthly demand without annualizing.
- Ignoring stockouts.
- Wrong holding cost basis.
Decision guidance
Trust workflow
Recommended steps after getting a result:
- Ensure accurate input of annual demand, order costs, and holding costs.
- Double-check your calculations to avoid common errors.
- Evaluate the EOQ result in the context of your business needs.
FAQ
FAQ
Production EOQ?
Similar idea with setup vs holding—adjust labels.