Economic Order Quantity (EOQ) Calculator
Free Inventory Optimization & Supply Chain Cost Reduction Tool
Calculate the optimal order size to minimize total inventory costs. Balance ordering costs and holding costs for maximum efficiency.
EOQ Parameters
Total units needed per year
Cost to place one order (shipping, processing, admin)
Cost to hold one unit for a year (storage, insurance, obsolescence)
Purchase price per unit
Reorder Point Parameters
Time from placing order to receiving inventory
Operating days per year (typically 250-365)
Buffer inventory to prevent stockouts
Optimal Order Quantity
Perfect balance between ordering and holding costs
Annual Cost Breakdown
22.4 orders × R 50/order
224 avg units × R 5/unit/year
Ordering + Holding costs (optimized)
10,000 units × R 25/unit
Order Metrics
Inventory Management
Order when inventory reaches this level
Peak inventory level after order arrives
Buffer to prevent stockouts during lead time
Understanding Economic Order Quantity (EOQ): Complete Guide
What is Economic Order Quantity (EOQ)?
Economic Order Quantity (EOQ) is a fundamental inventory management formula that calculates the optimal order quantity that minimizes total inventory costs. It answers the critical question: "How much should I order each time to minimize my total costs?"
EOQ balances two opposing costs:
- Ordering Costs: Decrease as order size increases (fewer orders needed)
- Holding Costs: Increase as order size increases (more inventory to store)
The EOQ formula finds the sweet spot where these two costs are balanced, resulting in the lowest total inventory cost.
Key Benefit:
Using EOQ typically reduces total inventory costs by 10-30% compared to intuitive ordering practices.
The EOQ Formula
Variables Explained:
- D (Annual Demand): Total units required per year
- S (Ordering Cost): Fixed cost per order (regardless of order size)
- H (Holding Cost per Unit): Annual cost to hold one unit in inventory
All Variables & Metrics Explained in Detail
Annual Demand (D)
Definition:
Total number of units you need to purchase per year to meet customer demand or production requirements.
How to determine:
- Historical sales data or production forecasts
- Should be relatively stable and predictable
- For new products, use market research or pilot sales data
- Account for seasonality by using annual totals
Example: If you sell 200 units per week × 50 weeks = 10,000 units annual demand
Ordering Cost (S)
Definition:
The fixed cost incurred each time you place an order, regardless of order quantity.
Includes:
- Administrative costs: Staff time to create purchase orders, approvals, paperwork
- Communication costs: Phone calls, emails, vendor negotiations
- Shipping costs: Freight, courier fees (if fixed per shipment)
- Receiving costs: Inspection, counting, quality checks, data entry
- Accounts payable: Invoice processing, payment processing
Typical Range: $25-$150 per order for most businesses
Small businesses: $25-50; Large corporations with EDI: $10-20; Manual processes: $100+
Annual Holding Cost per Unit (H)
Definition:
The total cost to hold one unit of inventory for one year.
Includes:
- Storage costs: Warehouse rent, utilities, equipment (forklifts, racks)
- Capital costs: Opportunity cost of money tied up in inventory (typically 10-15%)
- Insurance: Property insurance on inventory value
- Taxes: Property taxes on inventory
- Obsolescence: Risk of product becoming outdated or unsellable
- Shrinkage: Theft, damage, spoilage, expiration
- Handling: Labor for moving, cycle counting, inventory management
Rule of Thumb: Holding cost = 20-30% of unit cost per year
Example: If unit costs R450, holding cost ≈ R90-135 per unit per year
Unit Cost (C)
Definition:
The purchase price paid to the supplier per unit.
Used to calculate:
- Annual purchase cost = D × C
- Holding cost (if calculated as % of unit cost)
- Total annual cost
Note: EOQ is independent of unit cost—changing price doesn't change optimal order quantity (unless it affects holding cost)
Lead Time (L)
Definition:
Time elapsed from placing an order until receiving the inventory (in days).
Includes:
- Order processing time at supplier
- Manufacturing or picking time
- Transit/shipping time
- Receiving and inspection time
Used to calculate: Reorder Point = (Daily Demand × Lead Time) + Safety Stock
Reorder Point (ROP)
ROP = (Daily Demand × Lead Time) + Safety StockWhat it tells you: When inventory drops to this level, place a new order for EOQ quantity.
Purpose: Ensures new inventory arrives before you run out (avoiding stockouts).
Example: Daily demand = 40 units, Lead time = 7 days, Safety stock = 100
ROP = (40 × 7) + 100 = 380 units
When inventory hits 380 units, order 447 units (EOQ)
Safety Stock
Definition:
Extra inventory held as a buffer against demand variability and supply delays.
Protects against:
- Demand spikes above forecast
- Lead time delays from supplier
- Quality issues requiring returns
- Supplier stockouts or production issues
How much? Typically 1-4 weeks of average demand, depending on variability and service level targets
Example Calculation (Using Default Values)
Scenario: Retail Store Inventory
- Annual Demand (D): 10,000 units
- Ordering Cost (S): $50 per order
- Holding Cost (H): $5 per unit per year
- Unit Cost (C): $25
- Lead Time: 7 days
- Working Days: 250 days/year
- Safety Stock: 100 units
Step 1: Calculate EOQ
EOQ = √(2 × 10,000 × 50 / 5)
EOQ = √(1,000,000 / 5)
EOQ = √200,000
EOQ = 447 units
Step 2: Calculate Number of Orders
Orders per Year = 10,000 ÷ 447 = 22.4 orders
About every 11 days
Step 3: Calculate Annual Costs
Annual Ordering Cost = (10,000 ÷ 447) × $50 = $1,118
Annual Holding Cost = (447 ÷ 2) × $5 = $1,118
Total Inventory Cost = $1,118 + $1,118 = $2,236
Note: At optimal EOQ, ordering cost = holding cost
Step 4: Calculate Reorder Point
Daily Demand = 10,000 ÷ 250 = 40 units/day
ROP = (40 × 7) + 100 = 380 units
Order 447 units when inventory hits 380 units
Inventory Policy:
• Order 447 units each time
• Place order when inventory drops to 380 units
• Expect to order about 22 times per year
• Total annual cost: $252,236 (includes $250K purchase cost)
Related Inventory Formulas
Number of Orders per Year
N = D / EOQHow many times you'll order per year at optimal quantity
Time Between Orders
T = Working Days / NDays between each order placement
Average Inventory Level
Average = EOQ / 2Average units held in stock (not including safety stock)
Annual Ordering Cost
AOC = (D / EOQ) × STotal cost of placing orders for the year
Annual Holding Cost
AHC = (EOQ / 2) × HTotal cost of storing inventory for the year
EOQ Assumptions & Limitations
✓ EOQ Assumes:
Demand is constant and predictable
Lead time is fixed and known
Ordering cost is fixed per order
Holding cost is linear (% of value)
No quantity discounts
Orders received all at once
⚠️ When NOT to Use EOQ:
Highly variable or unpredictable demand
Perishable products with short shelf life
Large quantity discounts available
Seasonal or promotional products
Make-to-order or custom products
High-value items ordered individually
Important Note:
EOQ is a guideline, not a rigid rule. Use it as a starting point and adjust based on real-world constraints like minimum order quantities, storage space, supplier terms, and cash flow considerations.
Benefits of Using EOQ
Minimize Total Inventory Costs
Balance ordering and holding costs for lowest total expense
Reduce Administrative Burden
Fewer orders mean less paperwork and processing
Optimize Cash Flow
Don't tie up excessive capital in inventory
Improve Warehouse Efficiency
Predictable order cycles enable better space planning
Reduce Stockouts
Combined with ROP, maintain optimal service levels
Data-Driven Decisions
Replace guesswork with mathematical optimization
Frequently Asked Questions
How do I calculate holding cost if I only know the unit price?
Use the rule of thumb: Holding cost = 20-30% of unit cost per year. For a $25 item, holding cost would be $5-7.50 per unit per year. This percentage includes storage (8-12%), capital cost (8-15%), insurance (1-3%), obsolescence (2-5%), and shrinkage (1-3%). Adjust the percentage based on your specific situation—higher for perishables or high-tech items, lower for stable commodities.
What if my EOQ is impractical (too large or too small)?
EOQ is a guideline. Round to practical quantities like full pallets, cases, or truckloads. If EOQ is 447 but products come in cases of 50, order 450 units (9 cases). If EOQ is too large for your storage, order less frequently and accept slightly higher total costs. If your supplier has minimum order quantities above EOQ, order the minimum. The cost curve is relatively flat near EOQ—ordering 10-20% more or less typically increases total cost by only 1-3%.
How often should I recalculate EOQ?
Recalculate when any key variable changes significantly: demand shifts by >20%, supplier changes ordering costs, storage costs change, or unit prices change substantially. For stable products, annual review is sufficient. For dynamic environments, review quarterly. Set up alerts when actual orders deviate significantly from EOQ—this may signal that inputs need updating.
What if my supplier offers quantity discounts?
Basic EOQ doesn't account for quantity discounts. You need to calculate total annual cost at each price break point and compare. Formula: Total Cost = (D × C) + (D/Q × S) + (Q/2 × H). Calculate for EOQ and each discount quantity. Choose the quantity with lowest total cost. Often, the discount savings exceed the extra holding cost of larger orders. For complex discount schedules, use inventory optimization software.
Can I use EOQ for products with seasonal demand?
Yes, but with modifications. Calculate separate EOQ for high season and low season using period-specific demand rates. Alternatively, use annual demand but adjust safety stock seasonally. For highly seasonal products (e.g., holiday items), EOQ may be less useful—focus on demand forecasting and build-ahead strategies instead. Consider just-in-time ordering during off-season to minimize holding costs.
How much safety stock should I hold?
Safety stock depends on three factors: (1) Demand variability—higher standard deviation requires more buffer, (2) Lead time variability—unreliable suppliers need more safety stock, (3) Desired service level—99% service level needs more than 95%. A common formula: Safety Stock = Z × σ × √L, where Z is the service level factor (1.65 for 95%, 2.33 for 99%), σ is demand standard deviation, and L is lead time. Start with 1-2 weeks of average demand and adjust based on stockout frequency.
What's the difference between EOQ and reorder point?
EOQ tells you HOW MUCH to order (optimal quantity), while reorder point tells you WHEN to order (trigger level). These work together: when inventory drops to the reorder point, place an order for EOQ quantity. EOQ minimizes costs, while ROP prevents stockouts. Both are essential for a complete inventory policy. EOQ answers "quantity?", ROP answers "timing?", and together they form a fixed-order-quantity inventory system.
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