Economic Order Quantity (EOQ): Optimize Your Inventory Costs

Learn how to calculate EOQ to balance ordering and holding costs for maximum efficiency

Eugene James Palmes

Eugene James G. Palmes

Industrial Engineer & Inventory Management Specialist

Published on: September 02, 2025 | 5 min read

What Is EOQ and Why Should You Care?

I'll be real with you, the first time I came across the EOQ formula was on my very first job at a furniture manufacturing facility. At that time, I had no idea this little formula would save us big money.

Within six months of applying EOQ to wooden boards (our main raw material), we cut our inventory costs by about 35%. That's when I realized, this formula isn't just a textbook exercise. It's a profit-saver. And if you run a business with inventory, you're leaving money on the table if you're not using it.

Key Definition: Economic Order Quantity (EOQ) is a classic formula in inventory management that tells you the optimal quantity to order to minimize the total costs of ordering and holding inventory.

According to Heizer & Render's Operations Management (a go-to reference in the field), EOQ minimizes the total cost of ordering and holding inventory.1

The EOQ Formula (Don't Worry, It's Simple)

Here's the formula you'll see everywhere:

EOQ = √[(2 × D × S) / H]
Where:
D = Annual demand (units)
S = Ordering cost per order
H = Holding or carrying cost per unit per year

Looks intimidating? It's not. Think of it as:

👉 EOQ = the order size that makes your ordering costs and holding costs balance out.

⚠️

The Most Common Mistake I See

A lot of people (even smart ones!) mess up EOQ when they:

  • Use the wrong cost inputs (forgetting hidden carrying costs like insurance or shrinkage)
  • Assume demand is the only factor in calculating order quantity, spoiler alert: it never is

This is why calculating EOQ manually on paper or Excel can lead to false confidence. I've seen managers swear they're saving money, only to realize they're still bleeding cash because they skipped costs.

Real-World Example: From My First Job

Back at the furniture facility, we constantly argued about how much raw material to order. One guy wanted to stockpile to "be safe." Another said we should order less because we were running out of space.

When I applied EOQ to our wooden boards, the numbers gave us clarity. We stopped arguing and started ordering smart. Result? 35% inventory cost savings in half a year.

We didn't stop there, we expanded EOQ to other materials. Each one added more efficiency, more savings.

How to Calculate EOQ for Your Business (Step by Step)

  1. Find your annual demand (D). Example: 24,000 units per year.
  2. Find your ordering cost (S). Example: $50 every time you place an order.
  3. Find your holding cost (H). Example: $2 per unit per year.
  4. Plug into the formula.
EOQ = √[(2 × 24000 × 50) / 2] = 1,095 units

This means you should order about 1,095 units per order to minimize total costs.

Skip the Math (Use Our Free EOQ Calculator)

Not everyone wants to do the math every time. That's why we built the EOQ Calculator. Just punch in demand, ordering cost, and holding cost, boom, instant EOQ.

Try Our EOQ Calculator

Why Bother With EOQ Instead of "Ordering When You Feel Like It"?

If you're running a small business, you might think, "I'll just order when I feel stock is low."

Here's the hard truth:

EOQ isn't just about math. It's about protecting your cash flow and keeping customers happy.

Frequently Asked Questions

Q1. What does EOQ tell you?
EOQ tells you the most cost-effective quantity of items to order at once. It balances ordering costs (like admin fees or delivery charges) and holding costs (like storage, insurance, and spoilage).
Q2. Can EOQ be in decimal?
Yes, EOQ can result in a decimal. In practice, you usually round it to the nearest whole number since you can't order a fraction of a unit.
Q3. Is ROQ and EOQ the same?
No. ROQ (Reorder Quantity) is how much you reorder when stock hits the reorder point, while EOQ (Economic Order Quantity) is the optimal order size to minimize costs.
Q4. Which costs does EOQ minimize?
EOQ minimizes the combined costs of ordering and holding inventory. These two costs typically move in opposite directions, and EOQ finds the balance point.
Q5. When should EOQ be modified?
You should recalculate EOQ whenever demand, ordering costs, or holding costs change significantly. For example, if your supplier increases delivery fees or if storage costs go up.
Q6. Who developed the EOQ model?
The EOQ model was first developed by Ford W. Harris in 1913 and later expanded by R.H. Wilson. It's one of the oldest and most widely used formulas in operations management.
Q7. How does EOQ affect cash flow?
By preventing overstocking, EOQ frees up working capital that would otherwise be tied up in excess inventory. It also reduces waste and storage expenses, leading to healthier cash flow.
Q8. What is EOQ in supply chain management?
In supply chain management, EOQ helps businesses decide the optimal order size to balance demand with costs. It ensures smoother replenishment cycles and less financial strain.
Q9. Why are EOQs conducted?
EOQs are calculated to determine the most economical order quantity. Businesses conduct EOQ analysis to cut down costs, avoid stockouts, and ensure efficient inventory control.
Q10. Which assumptions does the EOQ model rely on?
The classic EOQ model assumes:
  • Constant demand
  • Constant lead time
  • Fixed ordering and holding costs
  • No stockouts allowed
These assumptions make the math simpler but may not always reflect reality.

Wrapping Up

I'll never forget that first win with EOQ in the furniture plant, it taught me that numbers can save businesses. And now, with tools like our EOQ calculator, you don't even need to sweat the math.

So, the next time you're unsure how much to order, don't guess. Calculate. Save. Repeat.

Professional Tip: Always consider hidden costs when calculating holding costs. These can include insurance, taxes, shrinkage, obsolescence, and the opportunity cost of capital tied up in inventory.

References

  1. Heizer, J., Render, B., & Munson, C. (2020). Operations Management: Sustainability and Supply Chain Management. Pearson.
  2. Harris, F. W. (1913). How many parts to make at once. Factory, The Magazine of Management, 10(2), 135-136.
  3. Wilson, R. H. (1934). A scientific routine for stock control. Harvard Business Review, 13(1), 116-128.
  4. Silver, E. A., Pyke, D. F., & Peterson, R. (1998). Inventory Management and Production Planning and Scheduling. John Wiley & Sons.
  5. Nahmias, S. (2005). Production and Operations Analysis. McGraw-Hill/Irwin.

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