What is Economic Order Quantity (EOQ)?

Economic Order Quantity (EOQ) is a classic inventory management formula that determines the ideal number of units a business should order each time it replenishes stock. The goal is to minimize total inventory costs by finding the sweet spot between ordering costs (shipping, processing, receiving) and holding costs (storage, insurance, capital tied up in stock). Ordering too frequently drives up procurement and shipping expenses; ordering too much at once inflates carrying costs and ties up working capital. EOQ calculates the mathematically optimal order size that balances these competing cost pressures.

Why It Matters

Most businesses either order too much or too little because they rely on intuition or round numbers rather than data-driven calculations. Overstocking locks up cash in slow-moving inventory and increases storage costs, while understocking triggers expensive rush orders, stockouts, and lost sales. EOQ provides a systematic, repeatable method for right-sizing purchase orders that directly reduces total inventory costs by 10–20% for businesses implementing it for the first time.

EOQ is especially valuable for businesses with predictable demand patterns and consistent lead times—common in staple products, consumables, and replenishment-driven categories. Even when demand fluctuates, EOQ serves as a baseline that can be adjusted seasonally or as conditions change, providing a rational starting point rather than guesswork.

How It Works

The EOQ formula and its application involve several key components:

• The Formula: EOQ = √(2DS / H), where D = annual demand (units), S = ordering cost per order (fixed cost of placing and receiving one order), and H = annual holding cost per unit. For example, if annual demand is 10,000 units, each order costs $50 to place, and holding cost is $2 per unit per year, EOQ = √(2 × 10,000 × 50 / 2) = √500,000 ≈ 707 units per order.
• Order Frequency: Dividing annual demand by EOQ gives the optimal number of orders per year. In the example above, 10,000 / 707 ≈ 14 orders per year, or roughly one order every 26 days.
• Total Cost Minimization: At the EOQ point, annual ordering costs equal annual holding costs. Any deviation from EOQ increases total costs—ordering more raises holding costs faster than it reduces ordering costs, and ordering less does the opposite.
• Assumptions and Limitations: Classic EOQ assumes constant demand, fixed ordering costs, fixed holding costs, and no quantity discounts. Real-world conditions often deviate from these assumptions, so EOQ is best used as a starting framework that’s refined with safety stock buffers, supplier discount tiers, and seasonal adjustments.
• Integration with Reorder Points: EOQ answers "how much to order" while the reorder point answers "when to order." Together, they form a complete inventory replenishment strategy: when inventory drops to the reorder point, place an order for the EOQ quantity.

How Nventory Helps

Nventory automates EOQ calculations using your actual sales data, supplier costs, and warehouse carrying costs. Rather than manually computing EOQ with spreadsheets, the system continuously recalculates optimal order quantities as demand patterns shift. When paired with automated reorder points, Nventory can generate purchase orders at the right time for the right quantity—reducing both procurement costs and excess inventory without manual intervention.