Economic Order Quantity (EOQ): Formula, Calculator and Worked Examples [2026]

Every time you place an order, you pay. Every time you hold stock, you pay too. Economic order quantity is the order size that balances those two costs. Order too often and ordering costs eat you alive. Order too much and holding costs balloon. EOQ finds the middle point. This guide explains the formula, walks through a real example, and shows where EOQ helps and where it falls short.

What Is Economic Order Quantity?

Economic order quantity is the ideal number of units to buy each time you place an order. The goal is not to minimise purchase price. It is to minimise the combined cost of placing orders and holding stock.

If you order tiny amounts every day, you spend a fortune on admin, shipping and processing. If you order a year's worth at once, you spend a fortune on warehouse space, insurance, capital tied up and obsolescence risk.

EOQ finds the quantity where those two costs are balanced. It is one of the oldest and most useful formulas in operations, and it still works as a baseline even when reality is messier than the model.

The EOQ Formula

EOQ = √(2DS ÷ H)

Where:

• D = Annual demand in units. How many you sell in a year.
• S = Ordering cost per order. The fixed cost every time you place an order, not the unit cost.
• H = Holding cost per unit per year. Storage, insurance, capital cost and obsolescence risk, usually expressed as a percentage of unit cost.

The formula answers a simple question: given how much you sell, how much it costs to order, and how much it costs to hold, what order size minimises your total inventory cost?

Worked Example: A Clothing Wholesaler

You sell a particular hoodie to boutiques.

• Annual demand (D): 2,400 units
• Ordering cost (S): £50 per order
• Holding cost (H): £8 per unit per year

Plug into the formula:

EOQ = √(2 × 2,400 × 50 ÷ 8)

EOQ = √(240,000 ÷ 8)

EOQ = √30,000

EOQ = 173 units

So the optimal order size is about 173 hoodies per order. That means roughly 14 orders per year:

Orders per year = 2,400 ÷ 173 = 13.9

Days between orders = 365 ÷ 13.9 = 26 days

Practically, you would place an order about every 26 days, or roughly once a month, for around 200 hoodies if you round up to a convenient pack size.

The total annual cost at EOQ is:

• Ordering cost = 13.9 orders × £50 = £695
• Holding cost = (173 ÷ 2) × £8 = £692
• Total inventory cost = £1,387

Notice how ordering cost and holding cost are almost equal. That is the hallmark of a good EOQ. If one is much larger than the other, you are ordering too much or too little.

What Are Ordering Costs?

Ordering costs are the fixed costs that happen every time you place an order, regardless of size. They include:

• Admin time. Someone has to create the purchase order, check it, send it and process the invoice.
• Supplier minimums or fees. Some suppliers charge a flat fee per order or have small-order surcharges.
• Shipping fixed costs. Pallet charges, freight minimums, customs handling and courier booking fees.
• Inspection and receiving. Unloading, counting, quality checks and putting stock away.

If you order twice as often, these costs double. That is why larger orders reduce ordering cost per unit.

What Are Holding Costs?

Holding costs are what you pay to keep stock on hand for a year. They include:

• Warehouse rent and utilities. The space the stock occupies.
• Insurance. Covering the value of stored goods.
• Capital cost. The money tied up in stock could be used elsewhere in the business.
• Obsolescence and shrinkage. Stock that goes out of date, gets damaged or is stolen.

A common rule of thumb is that holding cost is 20-30% of the unit cost per year. A £100 item probably costs £20-£30 a year just to hold. That is why over-ordering is expensive even when the unit price looks cheaper.

Orders Per Year and Days Between Orders

The EOQ number itself is useful, but the real operational insight comes from what it implies.

Orders per Year = Annual Demand ÷ EOQ

Days Between Orders = 365 ÷ Orders per Year

These numbers turn a theoretical quantity into a purchasing rhythm. If EOQ says 173 units and you sell 9 units a day, you will order roughly every 19 working days. That is the kind of number a buyer can actually use.

Total Annual Cost Breakdown

Total inventory cost is the sum of ordering cost and holding cost. The relationship between them creates a U-shaped curve.

• Small orders: high ordering cost, low holding cost.
• Large orders: low ordering cost, high holding cost.
• EOQ: the bottom of the curve where total cost is lowest.

In the hoodie example, ordering 100 units at a time would push ordering cost up to £1,200 and holding cost down to £400, for a total of £1,600. Ordering 400 units at a time would push holding cost up to £1,600 and ordering cost down to £300, for a total of £1,900. The EOQ of 173 units lands at £1,387, saving several hundred pounds a year on one SKU.

Limitations of EOQ

EOQ is powerful but it is not a magic number. It makes assumptions that do not always hold.

• Constant demand. If your sales swing wildly by season, a single annual EOQ will be wrong for half the year.
• Fixed ordering and holding costs. In reality, freight rates change, warehouse space becomes tight and capital costs move.
• No bulk discounts. EOQ ignores price breaks. Sometimes ordering more to hit a discount is cheaper than the pure EOQ.
• No lead time variability. EOQ tells you how much to order, not when. You still need safety stock and a reorder point.

Use EOQ as a baseline, then adjust for the messy realities of your business.

EOQ with Bulk Discounts

Suppliers often offer lower unit prices for larger quantities. EOQ does not automatically choose the discounted quantity, but you can compare total costs.

For each price tier, calculate:

Total Cost = Purchase Cost + Ordering Cost + Holding Cost

If the discount tier saves more on purchase price than it adds in holding cost, order the larger amount. Otherwise, stick with the EOQ. Our EOQ calculator can help you compare these scenarios side by side.

How VNDLY Calculates Optimal Order Quantities Dynamically

Static EOQ is a great starting point, but demand changes. A product that sold 2,400 units last year might sell 3,200 this year. A supplier that charged £50 per order might now charge £35. A warehouse that was half empty might now be full.

VNDLY recalculates optimal order quantities continuously based on actual sales velocity, current supplier costs, lead times and holding costs. When demand rises, it recommends larger or more frequent orders. When a product slows, it pulls back. You can also set supplier minimum order quantities and pack sizes so recommendations are actually usable.

Frequently Asked Questions

What does EOQ stand for?

EOQ stands for Economic Order Quantity. It is the order size that minimises the total cost of ordering and holding inventory.

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 a typical holding cost percentage?

Holding cost is usually 20-30% of the unit cost per year. It includes storage, insurance, capital cost and obsolescence risk.

Can EOQ handle seasonal demand?

Not directly. EOQ assumes steady demand. For seasonal products, calculate EOQ per season or use dynamic inventory software that adjusts to actual sales trends.

How is EOQ different from reorder point?

EOQ tells you how much to order. Reorder point tells you when to order. You usually use both together: when stock hits the reorder point, order the EOQ quantity.