Economic order quantity (EOQ)
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is economic order quantity (EOQ)?
Economic order quantity (EOQ) is the order size that minimizes the combined cost of ordering and holding an item with steady demand. The classic formula is EOQ = √(2 × annual demand × cost per order ÷ annual holding cost per unit).
How it works
Ordering more often costs more in purchasing and receiving work, while ordering more at once costs more in carrying cost; EOQ is the balance point. Buyers then adjust it for supplier minimums, case packs, freight minimums and quantity discounts.
Economic order quantity (EOQ) example
For a valve that sells 1,200 a year, costs $50 per order to buy and receive, and $3 a year to hold, EOQ = √(2 × 1,200 × 50 ÷ 3) = 200, or about six orders a year.
Related terms
- Reorder pointA reorder point is the stock level at which a distributor places a new purchase order for an item, set so the new stock arrives before the old runs out.
- Inventory carrying costInventory carrying cost is the total cost of holding inventory over time: the cash tied up, space, insurance, taxes, handling, damage and obsolescence.
- Minimum order quantity (MOQ)A minimum order quantity (MOQ) is the smallest amount a supplier will sell in one order, set as a number of units or cases or as a dollar value.
- Min/maxMin/max is a simple replenishment method in which each item has a minimum and a maximum stock level that trigger and size each new order.
