EOQ Calculator

Frequently Asked Questions

What is Economic Order Quantity (EOQ)?

Optimal order quantity that minimizes total inventory cost. Formula: EOQ = sqrt((2 × Demand × Order Cost) / Holding Cost). Balances ordering frequency (frequent = high order costs) vs. holding cost (large orders = high storage cost).

When does EOQ break down?

Quantity discounts (suppliers give bulk pricing), volatile demand (assumes constant demand), perishable goods (storage cost rises non-linearly), or supply constraints. Modify formula for your context - pure EOQ is a baseline, not a final answer.

How do I use EOQ in practice?

Calculate EOQ for each SKU. Adjust for lead time (when to reorder = EOQ - lead time × daily demand). Combine with safety stock for demand variability. Most ERP systems automate this, but understanding the formula reveals when their settings are wrong.

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How This Calculator Works

The Economic Order Quantity is the order size that minimizes total inventory cost by balancing two opposing forces. Order too often and ordering costs (setup, shipping, processing) pile up; order too much and holding costs (storage, capital, spoilage, insurance) pile up. The Wilson formula finds the sweet spot: EOQ = √(2DS ÷ H), where D = annual demand, S = cost per order, H = holding cost per unit per year. It then derives orders per year (D ÷ EOQ), days between orders, and the minimized total annual cost = S × (D÷EOQ) + H × (EOQ÷2).

Why the Total-Cost Curve Is Flat at the Bottom

At the EOQ, annual ordering cost exactly equals annual holding cost - that's the mathematical signature of the optimum. A practical consequence: the cost curve is shallow near the minimum, so ordering 20% above or below EOQ typically raises total cost by only ~2%. This means you can round EOQ to a convenient pallet, truck, or case quantity, or to a supplier minimum, with negligible penalty. Don't treat the number as exact - treat it as the center of a wide, cheap zone.

Estimating the Inputs

Holding cost (H) is the hardest and most underestimated: include warehouse space, the cost of tied-up capital (often 15–25% of unit value/yr), insurance, shrinkage, and obsolescence - commonly 20–30% of item cost annually.

Order cost (S) is fixed per order regardless of size: PO processing, inbound freight, receiving, and inspection labor.

Demand (D) must be annual and reasonably steady - the model assumes constant, predictable usage.

When EOQ Breaks Down

Classic EOQ assumes constant demand, instant replenishment, no stockouts, and no quantity discounts - rarely all true. Use it as a baseline, then adjust: layer in safety stock and a reorder point for demand/lead-time variability; switch to the quantity-discount EOQ when suppliers offer price breaks (the cheaper unit cost can outweigh higher holding cost); and don't apply it to highly seasonal, perishable, or lumpy-demand items where it misleads.

Common Mistakes

Lowballing holding cost by counting only storage and ignoring the cost of capital - the biggest hidden component.

Mixing time units - demand must be annual to match an annual holding cost.

Applying one EOQ to all SKUs - high-value/low-volume items behave nothing like cheap fast-movers; segment with ABC analysis.

Treating EOQ as a rigid rule instead of a starting point you round to real-world order constraints.

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