EOQ Calculator

It is the order size that makes the sum of your yearly ordering cost and your yearly holding cost as small as it can be. Everything below that quantity means you are placing too many POs. Everything above it means you are tying up too much cash in inventory. The EOQ Formula Guide walks through the math and the assumptions in operator language.

Ignore raw EOQ and use the total-cost extension instead. Compute total annual cost (ordering plus holding plus purchase cost) at the EOQ, then at each discount break, and pick the lowest. When the discount is 3 to 5 percent, the extra holding cost from ordering above EOQ is almost always outweighed by the reduced unit price, especially on high-COGS categories. The EOQ Formula Guide has a worked comparison.

The standard rule is 20 to 30 percent of the unit's landed cost annually. That percentage covers five buckets: cost of capital (usually 8 to 12 percent), storage and DC overhead (3 to 6 percent), insurance (0.5 to 1 percent), shrink (0.5 to 2 percent depending on category) and obsolescence (2 to 8 percent, higher for apparel and electronics). Retailers who use warehouse rent alone as holding cost systematically underestimate it, and their EOQ recommendations then push order sizes too small.

No. EOQ pays off on A-class SKUs with stable, predictable demand where the ordering and holding cost trade-off is real money. Run ABC classification first. For A items, apply EOQ. For B items, EOQ is a useful starting point that gets rounded to case-pack or truck-load multiples. For C items, forget the formula and use a simple periodic review policy because the annual cost differences are too small to justify precision.

EOQ decides how much to order each time a PO fires. Safety stock decides how much cushion to hold above expected demand. Reorder point decides when to fire the PO. They interact in one important way: cutting EOQ means more orders per year, which means more lead-time windows during which a stockout can happen, so shrinking order size without revisiting service levels quietly degrades availability. Order size and buffer size are two dials on the same machine.

For seasonal or trending SKUs, run EOQ on the trailing 8 to 12 weeks of demand annualized, and refresh the calculation quarterly instead of once a year. If demand swings more than 40 percent between quarters, EOQ becomes a rough guide rather than a precise answer. In that case, size the order to cover a fixed number of weeks of forward demand and let the Demand Planning Calculator drive the forecast underneath it.

Turnover measures how many times a year the average unit sells through. EOQ is the lever operators use to move turnover on purpose. Smaller order sizes lift turnover by lowering average inventory (which sits at EOQ/2). Larger order sizes push turnover down. The Inventory Turnover Calculator reports the resulting turn, and category benchmarks in Retail Turnover Benchmarks tell you whether the number is competitive.

For a mid-size retailer with an ERP-driven purchasing workflow, the fully-loaded cost per PO usually sits between $40 and $100. It rises above $150 when approvals are manual, when receiving and put-away are labor-intensive, or when a supplier requires custom compliance work per order. It falls below $30 when purchasing is heavily automated through EDI or vendor portals. The number that matters is the marginal cost of one additional PO, not the average, because that is what EOQ is trading off against.

Four show up repeatedly. Understating holding cost by using storage rent alone. Understating order cost by counting the buyer's time only. Applying EOQ to a highly seasonal SKU without adjusting demand. And ignoring supplier minimums and case-pack constraints that make the theoretical EOQ physically impossible to order. The last one is why most retailers round EOQ up to the nearest case pack or supplier minimum before it becomes a real PO.

When the SKU has short shelf life, in which case order size must be capped by expiry, not cost balance. When lead times are wildly unstable, in which case a fixed order size gets overwhelmed by supply risk. When quantity discounts exist, in which case total-cost EOQ replaces the basic version. And on any SKU where a stockout is far more expensive than excess inventory (loss-leader items, contractual supply items), because EOQ optimizes cost, not availability. For those, use a service-level driven policy through the Safety Stock Calculator.