Economic Order Quantity (EOQ)
The optimal order size that minimizes total inventory costs by balancing ordering costs against holding costs.
What is EOQ?
Economic order quantity (EOQ) is an inventory management formula that calculates the optimal number of units to order at one time to minimize the combined costs of ordering and holding inventory. The ordering cost decreases as order size increases (fewer orders needed per year), while the holding cost increases with order size (more inventory sits in the warehouse). The EOQ formula finds the quantity where these two costs are equal and their sum is minimized: EOQ = √(2DS/H), where D is annual demand, S is cost per order, and H is annual holding cost per unit. EOQ is a foundational concept in supply chain and operations management.
Example
A retailer sells 10,000 units per year, incurs $50 per order in administrative costs, and pays $2 per unit per year in holding costs. EOQ = √(2 × 10,000 × $50 ÷ $2) = √500,000 ≈ 707 units per order. Ordering 707 units roughly 14 times per year minimizes the retailer's total inventory costs.