Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula that identifies the ideal quantity of stock to order at one time. Order too little and you place orders constantly, each carrying its own administrative and processing cost. Order too much and goods sit in storage, tying up cash and accumulating holding costs: warehouse space, insurance, and the risk of obsolescence. EOQ finds the order size where those two costs balance out - the quantity that minimizes the total cost of keeping stock.

The model was first developed by F.W. Harris and is sometimes called the Wilson Formula. It applies to any business that orders and holds physical stock: a promotional merchandise distributor managing blank goods inventory, a construction business ordering materials in bulk, or a racking and storage supplier carrying multiple product lines.

The EOQ Formula

The standard calculation is:

EOQ = √(2DS / H)

Where:

• D is annual demand for the item (in units)
• S is the cost of placing one order (admin, processing, supplier communication, and receipt)
• H is the annual holding cost per unit (storage, insurance, depreciation, and the cost of capital tied up in stock)

For example: if annual demand is 1,200 units, order cost is £25 per order, and holding cost is £2 per unit per year, the EOQ equals the square root of (2 × 1,200 × 25 ÷ 2), which comes to approximately 173 units per order. At that quantity, you would reorder roughly seven times a year.

The core logic is that ordering costs and holding costs move in opposite directions. Placing fewer, larger orders reduces the cost of administering each purchase but increases storage expenditure. Placing more frequent, smaller orders cuts holding costs but drives up processing time per year. EOQ identifies the order size where those two costs are equal - which is also where their combined total is at its lowest.

Where EOQ Works and Where It Has Limits

EOQ performs best when demand for an item is reasonably consistent and both ordering and holding costs are known with confidence. For businesses with predictable reorder patterns - standard merchandise reorders, regularly consumed construction materials, or ongoing stock for a company store programme - it provides a practical baseline for replenishment decisions.

It is less reliable where demand varies seasonally, where supplier lead times are unpredictable, or where a supplier's MOQ forces orders that sit above the calculated quantity. In those situations, EOQ gives you a useful reference point rather than a hard rule. Pairing it with a reorder point and a safety stock level gives a more complete picture of both how much to order and when to trigger the order.

Tracking the inputs EOQ depends on - usage rates, order costs, and holding costs per line - requires accurate, up-to-date stock records. Zigaflow's inventory management tools help businesses keep stock levels and order history in one place, making the data needed for EOQ calculations easier to maintain as product lines and supplier terms change.