Economic Order Quantity (EOQ)
Definition
The order size that minimizes your total cost of ordering and holding inventory, balancing the cost of placing orders against the cost of storing stock.
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Formula
EOQ = √(2 × Annual Demand × Cost per Order ÷ Annual Holding Cost per Unit)EOQ is a starting point, not the final answer. Supplier MOQs, price breaks, container sizes and long lead times usually push real orders away from the formula.
Its real value is making holding cost visible, which most owners underestimate. Watch for: order sizes driven only by volume discounts, which can cost more in storage and cash than the discount saves.
Example
Annual demand of 12,000 units, $200 per order and $3 per unit per year to hold gives an EOQ of about 1,265 units.