Definition
Economic order quantity (EOQ) is the mathematically optimal order size that minimizes the combined total of ordering costs and carrying costs. The formula is: EOQ = √(2 × D × S / H), where D is annual demand (units), S is the cost per order placed (ordering cost), and H is the annual carrying cost per unit. At EOQ, the cost of placing orders equals the cost of holding inventory — the two curves intersect at the lowest total cost point. Ordering in quantities smaller than EOQ means too many orders and high ordering costs; ordering larger means excess inventory and high carrying costs.
Why It Matters
EOQ gives you a defensible, mathematically grounded answer to "how much should I order at a time?" Many distributors default to round numbers or supplier minimums — which are almost never optimal. Running EOQ analysis typically reveals over-ordering on slow items (excess carrying cost) and under-ordering on fast items (excess ordering cost). Correcting both reduces total procurement cost by 5–15%. Inventory Optimization Tool →
Frequently Asked Questions
What is the EOQ formula?
EOQ = √(2DS/H), where D = annual demand in units, S = cost per order placed (ordering cost), and H = annual carrying cost per unit held. The formula assumes constant demand and instantaneous replenishment — real-world applications typically use it as a starting point and adjust for supplier minimums and lead time variability.
What are the assumptions of the EOQ model?
Classic EOQ assumes: constant and known demand rate, instantaneous replenishment (no lead time), no quantity discounts, fixed ordering cost per order, and no stockouts. These assumptions rarely hold perfectly, but EOQ remains useful as a baseline that more advanced models refine.
How do quantity discounts affect EOQ?
When suppliers offer volume discounts at order quantity breakpoints, EOQ must be recalculated for each price tier. The optimal order quantity may shift to a higher tier if the discount savings exceed the additional carrying cost of the larger order. This is called the All-Units Discount EOQ model.