The trade-off between ordering and holding
Every inventory decision sits between two costs that pull in opposite directions. Each time you place an order you incur a fixed cost — paperwork, shipping, receiving, setup — so the fewer orders you place, the lower that cost. But every unit you order has to be stored, insured, and financed while it waits to be used, so the more you hold at once, the higher that cost. Order in huge batches and ordering costs fall but holding costs balloon; order in tiny batches and holding costs shrink but you are constantly reordering. EOQ is the order size where those two costs are balanced and their sum is at its lowest.
The EOQ formula
EOQ = √(2 × annual demand × cost per order ÷ holding cost per unit)
Higher demand or a higher fixed cost per order pushes the optimal order size up; a higher holding cost per unit pulls it down. The model rests on a few simplifying assumptions: constant, known demand across the year, no quantity discounts for buying in bulk, and instant replenishment when an order arrives. Real demand is lumpier than this, so treat the EOQ as a sensible baseline rather than an exact rule.
Worked example
Suppose your business sells 10,000 units a year, each order costs $50.00 to place, and holding one unit in stock costs $4.00 a year. Here is how the optimal order size falls out:
| Step | Amount |
|---|---|
| Annual demandunits sold or used over the year | 10,000 units |
| Cost per orderthe fixed cost to place and receive one order | $50.00 |
| Holding cost per unit per yearstorage, insurance, and financing for each unit in stock | $4.00 |
| = Economic order quantity√(2 × demand × order cost ÷ holding cost) — about 20 orders a year, for a total annual ordering + holding cost of $2,000 | 500 units |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then change any input to match your own inventory.
From order size to reorder point
The EOQ answers how much to order, but not when. That is the job of the reorder point — the stock level that, given your lead time and rate of use, signals it is time to place the next order so new stock lands just as the old runs out. Together they define the whole order cycle: EOQ sets the batch size and the reorder point sets the rhythm. The EOQ also feeds directly into how fast inventory moves; if you want to see how often your stock cycles through in a year, ourinventory turnover calculatorworks from the same demand figures, and to check the volume a product must sell before it earns back its fixed costs, see thebreak-even point calculator.
Frequently asked questions
What is economic order quantity?
Economic order quantity (EOQ) is the order size that makes total inventory cost as low as possible. It balances two opposing costs: the cost of placing and receiving each order, and the cost of holding stock once it arrives. The EOQ is the quantity at which those two costs are in balance, so ordering either more or less per batch would raise your total cost.
What is the EOQ formula?
The formula is EOQ equals the square root of two times annual demand times the cost per order, all divided by the holding cost per unit per year. The factor of two comes from the average inventory being half of each order. Demand and order cost push the optimal order size up, while a higher holding cost pulls it down, since expensive-to-store items are best ordered in smaller, more frequent batches.
What assumptions does EOQ make?
The classic EOQ model assumes demand is constant and known across the year, that the cost to place an order and the cost to hold a unit do not change, that stock is replenished instantly when an order arrives, and that there are no quantity discounts for ordering in bulk. Real demand is lumpier than this, so EOQ is best treated as a baseline order size rather than an exact prescription.
How does EOQ relate to the reorder point?
EOQ tells you how much to order; the reorder point tells you when to order. The reorder point is the inventory level that, given your lead time and daily usage, triggers a new order so fresh stock arrives just as the old stock runs out. Used together, EOQ sets the batch size and the reorder point sets the timing, which is how the order cycle implied by EOQ actually gets run in practice.
What happens if I order more or less than the EOQ?
Ordering more than the EOQ means larger batches and fewer orders, so ordering costs fall but holding costs rise as more stock sits in storage. Ordering less means smaller, more frequent batches, so holding costs fall but ordering costs climb. Total cost is fairly flat near the EOQ, so small deviations are inexpensive, but moving far in either direction raises the combined cost noticeably.
Disclaimer: This calculator is foreducation and illustration only. The EOQ model rests on simplifying assumptions — constant demand, fixed costs, instant replenishment, and no bulk discounts — that rarely hold exactly in practice. The figures it produces are a planning baseline, not a precise prescription for any specific business. Nothing here is financial or operational advice.