Economic Order Quantity Calculator

What is Economic Order Quantity (EOQ)?

Economic Order Quantity (EOQ) is the ideal order quantity that minimizes the total cost of inventory management. It balances two competing costs:

• Ordering Costs: The costs incurred each time you place an order (processing, shipping, receiving, inspection)
• Holding Costs: The costs of storing inventory (warehouse space, insurance, capital tied up, obsolescence risk)

Order too frequently and you spend too much on ordering. Order too infrequently and you spend too much on storage. EOQ finds the sweet spot.

The EOQ Formula

Where:

• D = Annual demand (units per year)
• S = Order cost ($ per order)
• H = Holding cost per unit per year ($)

Why EOQ Works

The formula is derived from calculus by finding where total cost is minimized. At EOQ:

• Total Order Cost = Total Holding Cost - This is always true at the optimal point
• Ordering more frequently (smaller batches) increases ordering costs but decreases holding costs
• Ordering less frequently (larger batches) decreases ordering costs but increases holding costs

EOQ Model Assumptions

Assumption	Reality Check
Demand is constant and known	Works best for stable, predictable items. For variable demand, add safety stock.
Lead time is constant	If lead times vary, consider the reorder point separately.
No quantity discounts	If you get volume discounts, you may want to order more than EOQ.
Orders arrive all at once	For gradual receipt (like manufacturing), use Production Order Quantity model.
No stockouts allowed	EOQ assumes you always have stock; pair with safety stock for real-world use.

When to Use EOQ vs. When to Adjust

EOQ works well when:

• Demand is relatively stable and predictable
• You have accurate cost data for ordering and holding
• Items dont have significant quantity discounts
• Storage space is not severely constrained

Consider adjusting EOQ when:

• Quantity discounts exist: Compare total cost at EOQ vs. discount breakpoints
• Storage is limited: May need to order less than EOQ
• Cash flow is tight: Smaller, more frequent orders may be better
• Items are perishable: Factor in shelf life constraints
• Demand is seasonal: Use modified EOQ or seasonal adjustments

Typical Holding Cost Components

A common rule of thumb is 20-30% of unit cost annually, broken down as:

• Cost of capital: 8-15% (opportunity cost of money tied up in inventory)
• Storage costs: 2-5% (warehouse space, utilities, handling)
• Insurance: 1-3%
• Obsolescence/shrinkage: 2-5% (damage, theft, expired goods)
• Taxes: 1-2% (property taxes on inventory in some jurisdictions)

Need More Than a Calculator?

This calculator gives you a quick answer for one SKU, but real inventory optimization requires:

• Automated EOQ calculations across all your SKUs
• Integration with your ERP for real-time cost and demand data
• Quantity discount analysis to find true optimal order quantities
• Combined EOQ + safety stock + reorder point optimization

Get a free assessment to see how Flair Group can automate inventory optimization for your entire catalog.