How to use the economic order quantity calculator
Ordering in large batches cuts the number of purchase orders, inbound freight charges, and receiving inspections, but it leaves more cash sitting on the warehouse floor. Ordering little and often does the reverse. Economic order quantity is the batch size where those two costs add up to the smallest total, and it needs only three inputs: annual demand, cost per order, and annual holding cost per unit.
The formula is the square root of two times annual demand times order cost, divided by annual holding cost per unit. Alongside EOQ, the calculator returns orders per year, the resulting order cycle in days, and the split between ordering and holding cost so you can compare it against how you buy today.
Holding cost has to include more than rent and labor. Insurance, shrinkage, obsolescence, and the opportunity cost of capital all belong in it. Leave them out and holding cost is understated, which pushes EOQ higher than it should be. A working range of 15 to 25 percent of unit value is common.
EOQ assumes steady demand and flat pricing. Fortunately the total cost curve is shallow around the optimum, so rounding up to a full case or pallet adds very little cost.
Frequently asked questions
Add warehouse rent, handling labor, insurance, shrinkage and obsolescence, and the interest on cash tied up in stock, then express it per unit per year. Many companies land between 15 and 25 percent of unit value.
EOQ assumes steady demand and no quantity discounts. Real orders get rounded up to case, pallet, or minimum order quantities, and volume price breaks can justify ordering more than the formula suggests.
Ordering cost falls because you order less often, but average inventory and holding cost rise. EOQ is the minimum of the two combined, and the total cost curve is flat near that point, so small deviations cost little.