Find the Order Quantity That Minimizes Inventory Costs
Enter your annual demand, ordering cost, unit cost, and holding rate to calculate the economic order quantity. See how ordering and holding costs balance at the optimal point.
Demand & Ordering
Inventory Costs
Holding cost per unit: $5.00 / year
Formula
EOQ = √(2DS / H)
D = Annual demand (12,000 units)
S = Order/setup cost ($50.00)
H = Holding cost/unit ($5.00)
Economic Order Quantity
490
units per order
Orders / Year
24.5
Cycle Time
14.9
days
Total Cost
$2,449
/ year
Cost Balance
At EOQ, ordering cost and holding cost are balanced. This minimizes total annual inventory cost.
Avg Inventory
245
units (EOQ / 2)
Avg Inventory Value
$6,125
at$25.00 / unit
EOQ Formula Explained
The Economic Order Quantity formula finds the order size where total annual inventory cost is at its minimum. It works by balancing two competing costs that move in opposite directions as order size changes.
EOQ = √(2DS / H)
Where D = demand, S = setup cost, H = holding cost per unit
Annual Demand
Total units consumed or sold per year. Use historical data or sales forecasts. Higher demand pushes EOQ up because you spread fixed ordering costs across more units.
Order / Setup Cost
Fixed cost incurred every time you place an order or set up a production run. Includes purchase order processing, receiving, inspection, and machine changeover time. Higher setup costs favor larger, less frequent orders.
Holding Cost
Annual cost to hold one unit in inventory. Typically 15-30% of unit cost, covering storage, insurance, obsolescence, capital tied up, and handling. Higher holding costs favor smaller, more frequent orders.
Assumptions and Limitations
The classic EOQ model makes several simplifying assumptions. Understanding these helps you judge how much to trust the result and when to adjust it.
| Assumption | Reality | Impact |
|---|---|---|
| Constant demand | Demand fluctuates seasonally and unpredictably | EOQ may under-order during peaks or over-order during slow periods |
| Fixed ordering cost | Setup times can be reduced through SMED and process improvement | Reducing setup cost lowers EOQ, enabling smaller batches |
| Instant replenishment | Lead times exist and may vary | Use reorder points alongside EOQ to account for lead time |
| No quantity discounts | Vendors commonly offer price breaks at certain volumes | Compare EOQ cost vs discount price at break quantity |
| Single item | Most operations manage hundreds of SKUs | Apply EOQ per item; consider joint replenishment for shared vendors |
When EOQ Doesn't Apply
EOQ works well for stable, repetitive demand patterns. Several common manufacturing scenarios call for different approaches.
Lumpy or Project-Based Demand
When demand arrives in large, irregular batches rather than a steady stream, EOQ's assumption of constant consumption breaks down. MRP-driven lot-for-lot ordering or period order quantities often work better for project-based manufacturing.
Perishable or Obsolescence-Prone Items
Parts with shelf life limits or high obsolescence risk need smaller batches regardless of what EOQ suggests. The holding cost rate should be adjusted upward significantly for these items, or a maximum stock level should override the EOQ result.
Lean and JIT Environments
Lean manufacturing aims to reduce batch sizes toward one-piece flow by driving down setup costs. Rather than accepting setup cost as fixed and optimizing around it, lean practitioners invest in setup reduction (SMED) to make smaller batches economical. EOQ is still useful as a baseline, but the goal is to shrink it over time.
Constrained Capacity
When production capacity or storage space is limited, EOQ may suggest batch sizes that exceed practical constraints. In these cases, use EOQ as a starting point and cap the order quantity at your capacity limit. The cost penalty for ordering slightly less than EOQ is usually small due to the flat cost curve near the optimum.