EOQ Calculator
Calculate Economic Order Quantity (EOQ) online. Free calculator determines optimal order size balancing ordering costs and carrying costs for efficient inventory management with charts.
About This Calculator
The EOQ Calculator helps supply chain managers, business owners, procurement professionals, and operations managers determine the optimal order quantity that minimizes total inventory costs. Economic Order Quantity (EOQ) is a classic inventory management model that finds the ideal balance between ordering costs and holding costs to reduce overall inventory expenses.
The calculator uses the standard EOQ formula: EOQ = √(2 × D × S / H), where D is annual demand in units, S is ordering cost per order, and H is holding cost per unit per year. For example, a company with annual demand of 10,000 units, ordering cost of £50 per order, and holding cost of £5 per unit per year would have an EOQ of 447 units, meaning they should order 447 units approximately 22 times per year (every 16 days), with total annual inventory costs of £2,236. At the EOQ, ordering costs (£1,118) and holding costs (£1,118) are equal, representing the minimum point on the total cost curve.
EOQ is widely used across manufacturing, retail, distribution, and e-commerce sectors. Manufacturers use it to optimize raw material purchases and production runs. Retailers apply it to determine how much stock to order for their stores. Distributors rely on EOQ to warehouse inventory efficiently. The model helps companies reduce working capital tied up in inventory, lower storage costs, and improve cash flow by ordering the right quantity at the right time.
Regional Notes
India: Indian businesses using EOQ should consider GST input tax credit when calculating holding costs, as GST paid on purchases is recoverable. The Companies Act 2013 requires inventory valuation at lower of cost or net realizable value, making EOQ useful for cost optimization in manufacturing and trading companies.
United States: US companies apply EOQ alongside ABC analysis and just-in-time (JIT) principles. Under US GAAP (ASC 330), inventory is valued at lower of cost or market. EOQ helps reduce carrying costs which typically range from 20-30% of inventory value including warehouse, insurance, taxes, and obsolescence.
United Kingdom: UK businesses follow FRS 102 Section 13 for inventory accounting. EOQ is commonly used in manufacturing and retail sectors. British Standard BS EN 15341:2007 provides maintenance KPIs that complement EOQ for spare parts inventory management. The UK's Warehousing and Storage sector uses EOQ to optimize pallet space and reduce storage costs.
Frequently Asked Questions
What is Economic Order Quantity (EOQ)?
Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs, including ordering costs and holding costs. It is a fundamental inventory management model that helps businesses determine the ideal number of units to order in each replenishment batch to balance ordering and carrying expenses.
How do you calculate EOQ?
EOQ is calculated using the formula EOQ = √(2 × Annual Demand × Ordering Cost / Holding Cost). For example, with annual demand of 10,000 units, ordering cost of £50 per order, and holding cost of £5 per unit per year, the EOQ would be √(2 × 10,000 × 50 / 5) = √(200,000) = 447 units per order.
What are ordering costs and holding costs?
Ordering costs are expenses incurred to place and receive an order, such as shipping, inspection, paperwork, and supplier communication. Holding costs (carrying costs) are expenses to store and maintain inventory, including warehousing, insurance, spoilage, obsolescence, and the opportunity cost of capital tied up in inventory.
What assumptions does the EOQ model make?
The basic EOQ model assumes constant and known annual demand, constant ordering cost per order, constant holding cost per unit, instantaneous delivery of orders, no quantity discounts, and no stockouts. While these assumptions are rarely perfectly met in practice, EOQ still provides a useful approximation for inventory planning.
How is EOQ used in inventory management?
EOQ helps businesses determine the optimal order size and reorder frequency to minimize total inventory costs. Companies use EOQ to set order quantities, plan purchase schedules, negotiate with suppliers, optimize warehouse space, reduce working capital tied up in inventory, and improve cash flow management across manufacturing and retail operations.
What is the total annual inventory cost at EOQ?
At the EOQ, total annual ordering cost equals total annual holding cost, creating the minimum point on the total inventory cost curve. The total annual inventory cost is the sum of annual ordering cost and annual holding cost. Ordering more or less than the EOQ will increase total costs.
Can EOQ be used for both manufacturing and retail?
Yes, EOQ applies to any business that holds inventory, including manufacturers managing raw materials and finished goods, retailers stocking products, distributors managing warehouses, and e-commerce businesses fulfilling orders. The model is universally applicable wherever ordering costs and holding costs can be quantified.
What are the limitations of the EOQ model?
EOQ limitations include its assumption of constant demand throughout the year, ignoring quantity discounts offered by suppliers, assuming instantaneous delivery with no lead time variability, and not accounting for seasonal demand fluctuations or stockout costs. More advanced models like quantity discount EOQ, production order quantity (POQ), and just-in-time (JIT) address some of these limitations.