Economic Order Quantity Calculator

The Economic Order Quantity (EOQ) is the order size that minimizes your total inventory costs. It answers one of the oldest questions in operations: how much should I order at a time?

Every time you place an order, you incur a setup cost— procurement time, shipping, receiving labor, inspection. Every unit you hold in inventory incurs a holding cost — warehouse space, insurance, spoilage, obsolescence, and the capital tied up that could be earning returns elsewhere. These two costs pull in opposite directions: order in small, frequent batches and your setup costs pile up; order in large, infrequent batches and your holding costs pile up instead.

EOQ finds the order size where those two costs balance out and their sum bottoms out. Buyers and planners lean on it anywhere a business keeps reordering the same item and would rather not just guess — retail, manufacturing, distribution, doesn't matter. Get it right and a distributor can typically shave 15-25% off annual inventory costs compared to ordering round numbers because they're round (1,000 units, because why not; once a month, because that's the schedule).

Breaking down each term:

• D (Annual Demand): how many units you sell or use per year. More demand means a larger optimal order makes sense, since you can amortize setup cost over more units.
• S (Setup Cost per Order): the cost to place and receive one order, in dollars. Includes procurement staff time, shipping, receiving labor, and inspection. Typically $50–$500 per order.
• H (Annual Holding Cost per Unit): how much it costs to keep one unit in inventory for a year, in dollars. Includes storage space, insurance, obsolescence risk, taxes, and the cost of capital tied up in that unit. Typically 20-35% of the unit's value per year.

Why the square root? The relationship between order size and total cost isn't linear — it's a U-shaped curve, and the minimum of that curve falls out of calculus as a square root. Practically, this means EOQ scales sub-linearly with demand: doubling annual demand doesn't double the optimal order size, it only increases it by about 40% (√2 ≈ 1.41). Bigger operations benefit from economies of scale in ordering, but not proportionally.

Company: MidWest Widget Distributors
Product: Industrial widgets
Annual demand: 10,000 units
Unit price: $100
Annual holding cost rate: 25% (typical for industrial goods)

Step 1 — Annual holding cost per unit:
$100 × 0.25 = $25/year per unit

Step 2 — Setup cost per order:
Procurement staff: 2 hours × $50/hr = $100
Shipping: $200
Receiving/inspection: 1 hour × $50/hr = $50
Total: $350 per order

Step 3 — Calculate EOQ:

Step 4 — Interpret: MidWest should order about 529 units at a time.

• Orders per year: 10,000 / 529 ≈ 18.9 (about 19 orders)
• Order frequency: roughly every 2-2.5 weeks
• Annual setup cost: 18.9 × $350 ≈ $6,614
• Annual holding cost: (529/2) × $25 ≈ $6,614
• Total annual cost: ≈ $13,229

Notice that annual setup cost and annual holding cost come out almost exactly equal — that's not a coincidence. At the true EOQ, the two cost curves cross, which is precisely why the square-root formula produces a minimum there.

Compare against two "round number" alternatives:

• Ordering 1,000 units: setup $3,500 + holding $12,500 = $16,000 (+$2,771 wasted vs. EOQ)
• Ordering 250 units: setup $14,000 + holding $3,125 = $17,125 (+$3,896 wasted vs. EOQ)

Either mistake — ordering too much or too little — costs MidWest thousands of dollars a year on a single SKU.

Demand, order cost, and holding cost rarely stay fixed for long. Drag the sliders below to see how EOQ and total cost respond in real time — then save a few scenarios to compare side by side. Try the decision-making framework against a scenario where demand jumps 25% or holding cost doubles.

EOQ assumes:

• Demand is roughly constant, not sharply seasonal
• Lead time is reliable and doesn't itself add risk
• Unit price and costs don't change over the planning horizon
• No volume discounts (or they're already factored into cost inputs)
• Holding cost scales linearly with the amount held
• Storage capacity isn't a binding constraint
• You're optimizing one product independently, not a shared budget across many

Question the result when:

• Demand is highly seasonal — recalculate per season instead of annually
• Prices are volatile — use a current or weighted-average cost, not a stale one
• Your supplier offers volume discounts — compare EOQ against each price break's total cost
• Storage space is genuinely constrained — cap order size below EOQ if needed
• The product is perishable — EOQ alone won't protect against spoilage; pair it with a shorter review cycle

Common mistake: applying EOQ to high-velocity, low-value items like nuts and bolts. When setup cost is a few dollars, the formula pushes toward ordering constantly (small, frequent batches) — at that point, a simple reorder trigger or just-in-time replenishment is often more practical than computing EOQ at all.

Lowballing the holding cost. A lot of buyers plug in just the storage rent — a couple bucks a unit — and call it done. Real holding cost includes insurance, obsolescence, capital tied up, the works, and usually lands at 20-35% of what the unit is worth. Skip that and your "optimal" order size comes out 50%+ too big.

Ignoring what the supplier will actually sell you. The formula says 500 units, the supplier's MOQ is 1,000 — the formula loses. You order in multiples of the MOQ and move on. Worth running the numbers through theMOQ Optimizer so you at least know what that constraint is costing you.

Running EOQ on last year's demand. Pull a stale number and the "optimal" order size just drifts further from reality every quarter you don't recalculate. Doesn't blow up all at once — just bleeds a little cost every cycle.

Forgetting that prices move. Same story with unit cost — carry last year's $100 forward and your holding cost is now understated, which nudges you toward ordering more than you should.

Treating it as a one-and-done calculation. EOQ isn't a plaque you hang on the wall. Setup cost changes, holding cost changes, demand changes — recalculate when any of those move enough to matter, not on some arbitrary fixed schedule.

The Widget Distributor example above (529 units) falls squarely in the typical retail distribution range — a reasonable, unremarkable result for that kind of business.

You now know your optimal order size. Here's how to put it to work:

1. Set your reorder point — use the Reorder Point calculator to know exactly when to place an order, not just how big it should be.
2. Calculate safety stock — add a buffer to protect against demand spikes or supplier delays that EOQ doesn't account for.
3. Check inventory accuracy — if your recorded stock doesn't match reality, every downstream calculation, including EOQ, inherits that error.
4. Compare supplier options with TCO — EOQ assumes a single known cost structure; Total Cost of Ownership helps you pick between suppliers first.
5. Revisit every 3-6 months, or sooner if demand, pricing, or holding costs shift meaningfully.

• Reorder PointEOQ tells you how much to order — ROP tells you when.
• Safety StockAdd a buffer on top of EOQ-driven cycle stock for variability.
• Inventory AccuracyEOQ is only as good as the demand and cost data feeding it.
• Total Cost of OwnershipEOQ assumes one supplier at one price — TCO compares options.

Go deeper on this site:

• What Is EOQ? (And Why It Matters)
• EOQ Formula Explained
• How to Calculate EOQ: Step-by-Step
• Real EOQ Example: Coffee Distributor
• What Changed? EOQ Decision-Making in Practice
• EOQ vs. Reorder Point
• EOQ Reality Check

Books:

• Supply Chain Management: Strategy, Planning, and Operationby Sunil Chopra (chapters on inventory management)
• Inventory and Production Management in Supply Chains by Edward Silver, David Pyke, and Douglas Thomas

Standards & curricula:

• APICS (ASCM) CSCP certification curriculum
• ISO 9001 inventory management principles

Online courses:

• Coursera: "Supply Chain Management" (Michigan State University)
• edX: "Operations Management Fundamentals"

These are general references for further study, not endorsements — verify course availability and content directly with the provider.