EOQ

EOQ formula and worked example

EOQ = √(2 × D × S ÷ H), where D is annual demand in units, S is the cost of placing one order, and H is the cost of holding one unit for a year.

For example, a SKU sells 12,000 units a year. Each purchase order costs $60 to raise, receive and pay, and holding one unit for a year costs $2. EOQ = √(2 × 12,000 × 60 ÷ 2) = √720,000 ≈ 849 units. That works out to about 14 orders a year. Order smaller and ordering costs rise; order larger and storage costs rise. The EOQ calculator does the math and shows the cost curve.

What goes into ordering and holding costs

EOQ is only as good as its two cost inputs. Estimate them honestly rather than precisely.

• Ordering cost (S): buyer time, approvals, freight charged per shipment, receiving labor, and invoice processing.
• Holding cost (H): cost of capital tied up in stock, storage space, insurance, shrinkage, and the risk of expiry or obsolescence.
• Holding cost is often expressed as a percentage of unit cost per year and then converted to a money amount per unit.

Adjusting EOQ to real constraints

The formula ignores the practical limits on what you can buy. Round EOQ to the supplier's case pack: if bottles come in cases of 12, 849 becomes 71 cases, or 852 units. Check it against the minimum order quantity and any price breaks, which can make a larger order cheaper overall. For products with a shelf life, never order more than you can sell before the stock ages out, however low the formula says the cost is. Finally, check you have the space.

EOQ vs reorder point

EOQ answers how much to order. The reorder point answers when to order. They work together: when stock falls to the reorder point, you raise a purchase order for roughly the EOQ, adjusted for packs and minimums. Safety stock sits inside the reorder point and does not change the EOQ.

Using EOQ with NextStock

NextStock doesn't calculate EOQ. Its supplier catalog stores the pack sizes, costs, lead times and minimum order quantities you round EOQ to, and replenishment suggestions propose purchases based on demand and cover. See purchasing and replenishment.