EOQ calculator
Economic order quantity (EOQ) is the order size that keeps the yearly cost of placing orders plus holding stock as low as possible. EOQ = √(2DS/H), where D is yearly demand in units, S is the cost of placing one order and H is the cost of holding one unit for a year. At the EOQ, the yearly ordering cost equals the yearly holding cost.
987units
Economic order quantity: the order size with the lowest yearly cost.
That is about 15 orders a year, one every 25 days. Ordering and holding each cost $1,184 a year, $2,368 in total.
Ordering 1,500 at a time costs $211 more a year than the EOQ (+8.9%).
How the EOQ formula works
- Estimate yearly demand for the SKU in units, D.
- Add up what it costs to place one order, whatever its size, S.
- Work out what it costs to hold one unit for a year, H.
- Multiply 2 × D × S, divide by H and take the square root.
√(2 × 14,600 × $80.00 ÷ $2.40) = 987 units
Small orders mean many orders, so ordering cost climbs; large orders mean more stock sitting on the shelf, so holding cost climbs. The EOQ is where the two are equal, at the bottom of the total cost curve.
EOQ tells you how much to order. To know when, use the reorder point calculator, and size the buffer under it with the safety stock calculator.
Order sizes near the EOQ cost almost the same
The bottom of the curve is flat, so you can round to case packs, pallet loads or a supplier’s minimum with little penalty. Anywhere from 808 to 1,205 units costs within 2% of the lowest total.
Away from the bottom, the penalty grows fast: ordering half or double the EOQ costs 25% more a year.
| Order size | Orders a year | Yearly cost | Over the EOQ |
|---|---|---|---|
| 493 | 30 | $2,960 | +$592 |
| 740 | 20 | $2,466 | +$99 |
| 987 (EOQ) | 15 | $2,368 | – |
| 1,233 | 12 | $2,427 | +$59 |
| 1,500 (yours) | 9.7 | $2,579 | +$211 |
| 1,973 | 7.4 | $2,960 | +$592 |
Finding your holding cost
Holding cost is what one unit costs to keep for a year: storage, the cost of the cash tied up in it, insurance, and losses from damage, shrinkage or obsolescence.
Storage is the easiest part to pin down. Count how many units fit on a pallet with the pallet calculator, then spread the pallet’s monthly rate over them. Fulfillment Hub USA’s published rate starts at $34.50 per standard pallet per month at the first tier.
$34.50 × 12 months ÷ 400 units = $1.04 per unit per year for storage
Add the cost of capital, insurance and expected loss to get your full holding cost.
Common questions
What is the EOQ formula?
EOQ = √(2DS/H). D is yearly demand in units, S is the cost of placing one order and H is the yearly cost of holding one unit. For 14,600 units a year, $80 an order and $2.40 a unit a year: √(2 × 14,600 × 80 ÷ 2.40) = √973,333 ≈ 987 units.
What counts as ordering cost?
Every cost that comes with placing one order, whatever its size: the time to raise and approve the purchase order, supplier order fees, freight charged per shipment rather than per unit, and receiving and checking the delivery.
What goes into holding cost?
The yearly cost of keeping one unit in stock: storage, the cost of the cash tied up in it, insurance, and losses from damage, shrinkage or obsolescence. At Fulfillment Hub USA, storage starts at $34.50 per standard pallet per month at the first tier, so with 400 units on a pallet, storage alone is about $1.04 per unit per year.
What if my supplier has a minimum order quantity?
Order the larger of the EOQ and the minimum, rounded to whole cases. The total cost curve is flat near the EOQ: ordering a quarter more, or a fifth less, than the EOQ adds only 2.5% to the yearly cost.
When does EOQ not fit?
EOQ assumes steady demand, a fixed cost per order, a constant holding cost and no volume discounts. For seasonal SKUs, quantity price breaks or short shelf life, use it as a starting point and compare the total cost of the real options.
How does EOQ relate to the reorder point?
EOQ tells you how much to order; the reorder point tells you when. Order the EOQ each time stock on hand plus stock on order falls to the reorder point.
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