Economic Order Quantity (EOQ) is the ideal number of units a business should order at one time to minimise the combined cost of ordering and holding inventory. Order in batches that are too large and holding costs climb; order too often in small batches and ordering costs climb. EOQ finds the sweet spot between the two.
EOQ formula
EOQ = √( (2 × D × S) ÷ H )
- D = annual demand in units
- S = ordering cost per order (admin, delivery, handling)
- H = annual holding cost per unit (storage, capital, spoilage)
Worked example
A Faisalabad clothing retailer sells 9,000 units of a basic shirt per year. Each purchase order costs Rs. 2,000 to place, and holding one shirt for a year costs Rs. 50. EOQ = √((2 × 9000 × 2000) ÷ 50) = √720,000 ≈ 849 units per order. Ordering roughly 849 shirts at a time gives the lowest total cost across the year.
Why EOQ matters
EOQ turns purchasing from guesswork into arithmetic. It tells you how much to buy, while the reorder point tells you when. Used together they keep working capital lean without risking stockouts. EOQ assumes fairly steady demand, so it works best for staple products and should be revisited when costs or demand shift.
EloERP’s cloud ERP can compute EOQ per product from your real purchasing and storage costs and suggest order sizes automatically, removing the spreadsheet work from procurement.
Related glossary terms
Frequently asked questions
What does EOQ actually minimise?
EOQ minimises the total annual inventory cost — the sum of ordering costs and holding costs. At the EOQ quantity these two costs are balanced, which is the lowest-cost point overall.
Is EOQ suitable for products with seasonal demand?
Classic EOQ assumes steady, predictable demand, so it is less accurate for highly seasonal or erratic items. For those, businesses adjust EOQ frequently or use it as a baseline alongside demand forecasting.
What is the difference between EOQ and reorder point?
EOQ is the order quantity — how many units to buy each time. The reorder point is the stock level that signals it is time to place that order. EOQ answers ‘how much’, the reorder point answers ‘when’.