What EOQ Calculates
Economic Order Quantity, or EOQ, estimates the order quantity that minimizes the combined annual ordering cost and annual holding cost in the basic inventory model.
The basic model assumes stable demand, constant ordering cost, constant annual holding cost per unit, instant replenishment, and no stockouts.
EOQ Input Definitions
| Symbol | Meaning | Example |
|---|---|---|
| D | Annual demand in units per year. | 12,000 units/year |
| S | Ordering cost per order. | $50 per order |
| H | Holding cost per unit per year. | $2 per unit/year |
| L | Lead time in days. | 10 days |
| d | Average daily demand. | D / working days |
What the Calculator Outputs
- EOQ: recommended order quantity under the basic model.
- Average inventory: EOQ / 2, before safety stock.
- Orders per year: annual demand divided by EOQ.
- Cycle time: days between orders.
- Annual ordering cost: number of orders times ordering cost.
- Annual holding cost: average inventory times holding cost per unit.
- Reorder point: demand during lead time plus safety stock.
Reorder Point Formula
The reorder point tells you the inventory level at which you should place a new order.
If you leave average daily demand blank, this calculator estimates it as:
Example Calculation
Annual demand, D = 12,000 units/year Ordering cost, S = $50/order Holding cost, H = $2/unit/year EOQ = √[(2 × 12,000 × 50) / 2] EOQ = √600,000 EOQ ≈ 774.60 units Orders per year = 12,000 / 774.60 ≈ 15.49 orders/year Average inventory = 774.60 / 2 ≈ 387.30 units
When the Basic EOQ Model Is Useful
The basic EOQ formula is useful for quick inventory planning when demand is reasonably stable and each order has a clear fixed ordering cost. It is especially helpful for comparing different inventory policies and understanding the tradeoff between ordering too often and holding too much inventory.
Important Assumptions
- Demand is known and relatively stable.
- Ordering cost per order is constant.
- Holding cost per unit per year is constant.
- Replenishment is assumed to arrive all at once.
- Quantity discounts are not included.
- Stockout cost is not included.
Common Mistakes
- Using monthly demand as D while using annual holding cost as H.
- Forgetting that H must be holding cost per unit per year.
- Using product price as holding cost instead of inventory carrying cost.
- Ignoring minimum order quantities from suppliers.
- Calculating reorder point without considering safety stock for uncertain demand or lead time.
Frequently Asked Questions
What is EOQ?
EOQ is the order quantity that minimizes ordering and holding costs in the basic inventory model.
What is the EOQ formula?
EOQ = √[(2DS) / H], where D is annual demand, S is ordering cost per order, and H is holding cost per unit per year.
What is average inventory in EOQ?
In the basic model, average inventory is EOQ / 2. If safety stock is used, average inventory is often estimated as EOQ / 2 + safety stock.
What is reorder point?
Reorder point is the inventory level where a new order should be placed. A simple formula is ROP = daily demand × lead time + safety stock.
Does EOQ include quantity discounts?
The basic EOQ formula does not include quantity discounts. If suppliers offer price breaks, a separate quantity-discount analysis is needed.