How to use the eoq calculator
- 1Enter the number of units you expect to sell in a year.
- 2Enter your cost to place one order: admin time, the supplier’s fixed order or delivery charge, and receiving and inspection.
- 3Choose whether you know the holding cost per unit per year, or as a percentage of the unit cost.
- 4Enter the holding cost: storage, insurance, shrinkage, and the cost of the cash tied up in stock.
- 5Read the economic order quantity, how often to order, and the yearly ordering, holding and total cost.
What economic order quantity means
Every order has a fixed cost to place, so ordering often gets expensive. But large orders mean more stock sitting in storage, which costs money to hold. The economic order quantity (EOQ) is the order size where these two costs balance and their total is lowest.
At the EOQ, your yearly ordering cost and yearly holding cost are equal. The total cost curve is flat near the bottom, so ordering 10% more or less than the EOQ usually adds very little cost. Rounding to a full case or pallet is fine.
EOQ = √(2 × D × S ÷ H) D = annual demand in units S = cost per order H = holding cost per unit per year
How the costs are worked out
Orders per year is your annual demand divided by the order size. Holding cost uses average stock, which is half the order size, because stock runs down from a full order to zero before the next one arrives.
Holding cost is often given as a percentage of the unit cost. Estimates of 15% to 30% a year are common once you include storage, insurance, damage, obsolescence and the return you could earn on the cash elsewhere, but use your own figures where you can.
Orders per year = D ÷ Q Annual ordering cost = (D ÷ Q) × S Annual holding cost = (Q ÷ 2) × H Total cost = Ordering cost + Holding cost
Assumptions behind the EOQ model
EOQ assumes demand is steady through the year, the cost per order and the holding cost are fixed, the unit price does not change with order size, and each order arrives in full. It does not plan for stockouts.
If your supplier offers quantity discounts, compare the total cost at the EOQ with the total cost at each discount break, including the saving on the purchase price. If sales are seasonal, run the calculation per season with that season’s demand.
EOQ tells you how much to order. To decide when to order, pair it with a reorder point that covers your lead time and safety stock.
Worked example
A shop sells 12,000 water bottles a year. Each order costs $50 to place and receive. A bottle costs $15, and the shop estimates holding cost at 20% of unit cost a year, which is $3 per bottle.
| Annual demand | 12,000 units |
| Cost per order | $50.00 |
| Holding cost per unit per year | $3.00 (20% of $15) |
| Economic order quantity | 632 units |
| Orders per year | 19.0 |
| Days between orders | 19.2 days |
| Annual ordering cost | $949.37 |
| Annual holding cost | $948.00 |
| Total annual cost | $1,897.37 |
Ordering about 632 bottles at a time, roughly every 19 days, keeps ordering and holding costs at about $1,897 a year. Ordering 3,000 at a time would cut ordering cost to $200 but raise holding cost to $4,500.