EOQ Formula Explained: Optimal Order Quantity Made Simple
EOQ formula explained for retailers and warehouses. Worked example, assumptions, and when to use a modified EOQ instead.
Economic Order Quantity (EOQ) is one of the oldest inventory formulas and still one of the most useful. It identifies the order size that minimizes the sum of ordering cost and holding cost. This guide explains the formula, the assumptions, and when to depart from it.
The formula
EOQ = √(2DS/H). D is annual demand, S is order cost, H is holding cost per unit per year. The result is the order quantity at which incremental ordering cost equals incremental holding cost — the mathematical optimum under the model’s assumptions.
Worked example
Annual demand 12,000 units, order cost $50, holding cost $2/unit/year. EOQ = √((2 × 12,000 × 50)/2) = √600,000 ≈ 775 units per order. Orders per year = 12,000/775 ≈ 15.5, or roughly every 24 days.
Key assumptions
EOQ assumes constant demand, constant lead time, no quantity discounts, and instantaneous replenishment. Real businesses deviate from these assumptions, which is why most modern operators use modified EOQ or service-level driven models for important SKUs.
When to use EOQ
EOQ is most valuable for A items with stable demand and known cost structures. For B and C items, the simple model is good enough; for highly variable demand or quantity-discount situations, use total-cost minimization instead.
Frequently Asked Questions
What if my supplier offers volume discounts?+
Use the total cost EOQ extension: compute total cost at the EOQ and at each discount break, and choose the lowest.
How is holding cost estimated?+
Typically 15–30 percent of unit value annually, covering capital, storage, insurance, and obsolescence.
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