BIZOMAT Tools · Inventory
Economic Order Quantity (EOQ)
What order quantity balances ordering and holding cost?
Calculates the economic order quantity that balances ordering and holding costs, and shows how flat the cost is near it.
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How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Annual demand | units | Annual demand |
| Cost to place an order | $ | Cost of placing and receiving one order (admin, receiving, inspection) |
| Annual holding cost / unit | $ | Annual holding cost per unit (unit cost × carrying rate) |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Annual demand
- What it is
- The number of units expected to be used or sold in a year, from the forecast or last year’s usage.
- Units and format
- Enter a number in units: a count of units. The form accepts 1 units or more.
- Example
- The form opens with 24000 units as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- EOQ rises with the square root of demand: four times the demand doubles the order quantity.
- Get it right
- Use annual demand even if you order monthly; the EOQ formula expects a yearly figure.
What this means: Cost to place an order
- What it is
- The cost of placing and receiving one order, whatever its size: purchasing time, freight charged per order, receiving and inspection.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $80 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- EOQ rises with the square root of this cost.
- Get it right
- Include only costs that recur with every order; costs that change with quantity belong in the unit price.
What this means: Annual holding cost / unit
- What it is
- What it costs to hold one unit in stock for a year: unit cost multiplied by the annual carrying rate.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0.01 or more.
- Example
- The form opens with $2 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- EOQ falls with the square root of holding cost.
- Get it right
- This is dollars per unit per year, not a percentage.
Method and formulas
- EOQ = √(2 × annual demand × order cost ÷ holding cost per unit)
- Annual cost = demand ÷ Q × order cost + Q ÷ 2 × holding cost
Limitations
- Steady demand, no price breaks, no stock-outs
Typical uses
- Setting order quantities for steady-demand items
- Reviewing frequent small orders
Who it is for
- Purchasing staff
- Inventory planners
What you get
- EOQ, orders per year and days between orders
- Total ordering and holding cost
- Cost at quantities around the EOQ
Interpreting the result
- Cost changes little near the EOQ, so round to practical pack sizes
References
- Harris F. W., “How many parts to make at once”, Factory, The Magazine of Management, 1913
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