Quick answer
The economic order quantity (EOQ) is the order size that minimises the combined cost of placing orders and holding stock. The formula is EOQ = √(2DS ÷ H), where D is annual demand in units, S is the cost of placing one order and H is the cost of holding one unit for a year. Use it as a starting point, then adjust for supplier minimums, price breaks, container sizes and shelf life.
Order too often and you pay more in freight, admin and receiving. Order too much and you tie up cash and warehouse space. The economic order quantity finds the balance. This guide explains the formula, works through an example and shows when to adjust it.
In this article
What is the economic order quantity?
The economic order quantity is a classic inventory formula that answers one question: how much should I order each time? It balances two costs that move in opposite directions:
- Ordering costs fall as order size grows, because you place fewer orders: purchasing admin, freight per shipment, customs clearance and receiving.
- Holding costs rise as order size grows, because you hold more stock on average: storage, insurance, capital tied up, shrinkage and obsolescence.
The economic order quantity is the point where the total of the two is lowest.
How do I calculate the economic order quantity?
EOQ = √(2 × D × S ÷ H)
| Input | Meaning | Example |
|---|---|---|
| D | Annual demand (units) | 12,000 units |
| S | Cost per order (admin, freight per shipment, receiving) | A$150 |
| H | Cost to hold one unit for a year | A$2 |
| EOQ | √(2 × 12,000 × 150 ÷ 2) | ≈ 1,342 units |
At 1,342 units per order you would place about nine orders a year. Annual ordering cost (about A$1,341) and annual holding cost (about A$1,342) are roughly equal, which is always true at the economic order quantity.
Holding cost is often estimated as a percentage of the unit cost per year, commonly 20–30% once storage, capital, insurance and obsolescence are included. See our guide to the cost of running a warehouse for what to include.
From our experience
The economic order quantity is most useful as a sanity check. When we compare a business’s actual order sizes with the EOQ, the gaps usually point to a habit, such as always ordering a full container or always ordering monthly, rather than a deliberate decision. That is where the savings are.
What are the limits of the economic order quantity?
- It assumes steady demand. Seasonal or promotional products need forecasts, not a single annual figure.
- It ignores supplier minimums (MOQs) and price breaks for larger orders.
- It ignores freight steps, such as filling a pallet, a 20-foot or a 40-foot container.
- It ignores shelf life and space limits. Perishable products and full warehouses need smaller orders.
- It does not set timing. When to order comes from your reorder point and safety stock.
How do I use the economic order quantity in practice?
- Calculate the economic order quantity for your top products by value.
- Round to practical quantities: full cartons, pallets or container loads.
- Check price breaks: work out total annual cost at the next discount level and compare.
- Check space and cash: make sure the warehouse and budget can hold the result.
- Set reorder points using lead time and safety stock.
- Review quarterly, as demand, freight costs and storage costs change.
Frequently asked questions
What is a good holding cost to use in the economic order quantity?
Many businesses use 20–30% of unit cost per year as a starting point. Calculate your own from storage, capital, insurance and obsolescence costs if you can.
Does the economic order quantity work for ecommerce?
Yes, for products with fairly steady demand. For seasonal or trending products, combine it with forecasts.
What if my supplier’s minimum order is higher than the EOQ?
Order the minimum, but check whether holding the extra stock costs more than the saving from ordering less often, and consider negotiating the minimum.
How is EOQ different from reorder point?
The economic order quantity tells you how much to order. The reorder point tells you when to order.
Can I calculate the economic order quantity in Excel?
Yes: =SQRT(2*D*S/H), with D, S and H in separate cells.
Want better order quantities and stock levels?
Warenous warehouse consultants can model order quantities, reorder points and safety stock from your data.
