Economic Order Quantity: Formula, Example and Limits
Calculate EOQ with annual demand, ordering cost and annual holding cost per unit, then test the model against MOQ, lead time, shelf life and uncertainty.
Economic order quantity estimates the order size that balances annual ordering and holding costs under a simplified model. It does not set safety stock, solve uncertain lead time or override supplier and storage constraints.
EOQ is useful when its three inputs are measured consistently. The formula becomes misleading when annual demand, cost per order or annual holding cost per unit is guessed or mixed across periods.
Calculate one EOQ example
Use annual demand D = 12,000 units, ordering cost S = ₹500 per order, and annual holding cost H = ₹20 per unit.
EOQ = √(2DS ÷ H) = √(2 × 12,000 × 500 ÷ 20) = √600,000 ≈ 775 units.
| Order quantity | Orders per year | Annual ordering cost | Average cycle stock | Annual holding cost |
|---|---|---|---|---|
| 600 | 20.00 | ₹10,000 | 300 | ₹6,000 |
| 775 | 15.48 | ₹7,742 | 387.5 | ₹7,750 |
| 1,000 | 12.00 | ₹6,000 | 500 | ₹10,000 |
Near 775 units, ordering and holding cost are approximately balanced. Small changes around the result may have little cost effect, so practical pack size and MOQ can matter.
Check the assumptions before using EOQ
- Demand is sufficiently stable for the chosen period.
- Ordering cost is the incremental cost per order.
- Holding cost is annual and expressed per unit.
- Shortage, quantity-break, shelf-life and capacity effects are either absent or reviewed separately.
- Safety stock and reorder timing are calculated separately.
Oracle inventory documentation provides a primary reference for EOQ-related planning concepts.
Use Optiwise data for the decision
Optiwise inventory and purchase records provide demand history, order records, current stock, open supply, supplier terms and material movements. Use that evidence to maintain the inputs and constraints. Do not describe EOQ as a native automatic optimiser unless it is configured and tested for your workflow.
Review stock and demand in inventory and supplier orders in purchase.
Questions from manufacturing teams
What is the EOQ formula?
EOQ = √(2DS ÷ H), where D is annual demand, S is ordering cost per order and H is annual holding cost per unit.
Does EOQ include safety stock?
No. EOQ estimates order quantity. Safety stock and reorder timing address uncertainty and replenishment timing.
Should we round EOQ to the supplier MOQ?
Compare feasible pack sizes and MOQ against the cost curve, storage, shelf life and service requirements before choosing the order quantity.
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