How to use the eoq calculator
- Enter the annual demand in units and the cost of placing one order, whatever the order size.
- Choose how you know the holding cost: a dollar amount per unit per year, or a percentage of the unit cost. The percentage in the box is an example, so use your own.
- Read the economic order quantity, the orders per year, the days between orders and the total yearly ordering plus holding cost.
- Look at the table to see how much extra cost you add by ordering smaller or larger batches than the EOQ.
Formula
EOQ = square root of (2 x D x S / H)
Orders per year = D / EOQ
Days between orders = 365 / orders per year
Ordering cost = (D / Q) x S, Holding cost = (Q / 2) x H
D = annual demand, S = cost per order, H = holding cost per unit per year
A 365 day year is used for the days between orders. If you enter the holding cost as a percentage, H = unit cost x percentage / 100.
Worked example
With 12,000 units of demand a year, $75 per order and $3 to hold a unit for a year, the EOQ is the square root of 600,000, or 774.60 units.
That means 15.49 orders a year, one every 23.56 days. Ordering cost is $1,161.90 and holding cost is the same, so the total is $2,323.79. Ordering only half the EOQ at a time raises the total to $2,904.74, and ordering 1.5 times the EOQ raises it to $2,517.44.
The trade off behind the formula
Ordering often means many order costs but little stock sitting around. Ordering rarely means few order costs but a large stock to store, insure and finance. Total cost is the sum of the two, and it is lowest where they are equal. That is the EOQ. The total curve is flat near the minimum, so an order a little above or below the EOQ costs only slightly more.
Choosing practical inputs
Ordering cost should include everything that happens once per order, such as paperwork, receiving and freight that does not change with size. Holding cost should include storage, insurance, shrinkage and the cost of money tied up in stock. Both are judgment calls, so run the calculator with a low and a high figure to see the range.
Once you know the order size, find when to place it with the reorder point calculator, and measure how fast stock sells with the inventory turnover calculator.
When EOQ does not fit
Volume discounts, minimum order quantities, perishable goods, uneven seasonal demand and limited storage all change the answer. Round the result to a case or pallet size that your supplier accepts, and check the table for the cost of that choice.
Assumptions and limits
- Demand is steady through the year and known in advance.
- The cost per order is the same for every order size, and the full order arrives at once.
- The holding cost percentage is an example value that you replace. The purchase price of the goods is not part of the totals.
- There are no stockouts, quantity discounts or capacity limits. A 365 day year is used for the cycle days.
Frequently asked questions
Why are ordering cost and holding cost equal at the EOQ?
The total cost is lowest where the two curves cross. At the EOQ, the yearly ordering cost D/Q x S equals the yearly holding cost Q/2 x H, which is why the stats show the same number for both.
Does EOQ include the price I pay for the goods?
No. It looks only at the cost of ordering and the cost of holding. If the unit price is the same at every size, it does not change which quantity is cheapest.
What if my supplier only sells in cases?
Round the EOQ to the nearest whole case and compare it with the nearby rows in the sensitivity table to see how little the total changes.
How do I enter holding cost as a percentage?
Pick the percent option, then enter the unit cost and the yearly rate. The calculator multiplies them to get dollars per unit per year and shows that figure.