What Is EOQ (Economic Order Quantity)?
Economic Order Quantity (EOQ) is the order size that keeps the combined cost of ordering and holding stock as low as possible. It gives businesses a data-based answer to "how much should we order at once?"
Ordering stock involves a trade-off. Order in large batches, and ordering costs go down. But carrying costs go up, since more stock sits around longer. Order in small batches, and carrying costs go down. But ordering costs go up, since orders happen more often. EOQ finds the order size where these two costs balance out.
The EOQ Formula
EOQ = √((2 × Demand × Ordering Cost) ÷ Carrying Cost per Unit)
Demand is the annual quantity needed. Ordering cost is the cost of placing a single order. Carrying cost per unit is the yearly cost of holding one unit in stock.
A Worked Example
Suppose a business needs 2,000 units of an item per year. It costs $50 to place each order, and $2 per year to carry one unit in stock.
EOQ = √((2 × 2,000 × 50) ÷ 2) = √(200,000 ÷ 2) = √100,000 ≈ 316 units
This means ordering roughly 316 units at a time keeps the combined cost of ordering and carrying that item as low as possible over the year.
What EOQ Assumes
The classic EOQ formula assumes steady demand, a fixed ordering cost, and a fixed carrying cost per unit. In practice, demand shifts and costs change. So EOQ works best as a useful starting point, not an exact, fixed number. Many businesses recalculate it now and then as costs and demand change.
When EOQ Is Most Useful
EOQ matters most for items with steady, high-volume demand. There, even small improvements in order size add up to real savings. For items with demand that swings a lot, other planning methods often work better.
Key Takeaways
EOQ works out the order quantity that keeps total ordering and carrying costs as low as possible. It works best for steady, predictable items. It's most useful as a guide you recalculate now and then, not a fixed rule.
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