What is Economic Order Quantity (EOQ) in Inventory Management?

Economic order quantity (EOQ) is a term for the ideal quantity a company should purchase to minimize its inventory costs, like shortage or carrying costs. The overall goal of economic order quantity is to decrease spending; its formula is used to identify the greatest number of units needed (per order) to reduce buying.

One of the primary gains of the EOQ model is customized recommendations for your particular company. At times, EOQ may suggest investing in a larger order to take advantage of discount bulk buying and to cut down on total costs associated with multiple shipments.

Calculating Economic Order Quantity (EOQ)

Calculating economic order quantity requires some math that might seem complicated at first, however once you get the variables from your inventory management system, it’s easy to plug in the numbers and calculate EOQ. When you use a robust ERP, these calculations may all be handled for you, including order costs like inventory ordering costs, holding costs and stockout costs.

Three Variables Used to Calculate EOQ

There are several variations of the formula used to calculate EOQ. One popular EOQ formula is based on these variables, also called inputs:

  1. D = Annual Demand in units
  2. S = Order cost
  3. H = Holding costs (per unit, per year)

Economic Order Quantity (EOQ) Formula

EOQ = √ [2DS/H]