Every business that buys inventory faces the same quiet dilemma: order too much and cash sits on shelves collecting dust, insurance bills, and obsolescence; order too little and you place order after order, each one carrying its own shipping, paperwork, and receiving cost, and you still risk stockouts. The Economic Order Quantity (EOQ) model solves this tradeoff with a single, clean number — the order size that keeps your total inventory cost as low as possible.
This EOQ calculator takes your annual demand, the cost of placing one order, and the cost of holding one unit for a year, then returns the ideal order quantity, how often you should reorder, and the total annual cost. Adjust the three inputs and the result updates instantly, so you can stress-test your buying decisions before you commit to a supplier.
How to Use
- Enter the Annual Demand — the number of units you expect to sell or consume over a full year. If your demand is seasonal, use a twelve-month average rather than your peak month.
- Set the Ordering Cost per Order. This is the fixed cost of a single purchase order: freight, processing the paperwork, inspection, and the labor of receiving. It is not the unit purchase price itself.
- Enter the Holding Cost per Unit — what it costs to store one unit for one year. Include warehouse rent, utilities, insurance, shrinkage, and the capital tied up in stock. A common shortcut is to use 20%–30% of the unit cost per year.
- Read the result card. The highlighted Economic Order Quantity is the order size that minimizes your total cost. The card also shows how many orders you will place per year, the days between orders, and the split between ordering cost and holding cost.
- Compare scenarios. Raise the ordering cost and watch the EOQ grow — when ordering is expensive, you naturally buy in bigger batches. Raise the holding cost and the EOQ shrinks — when storage is expensive, you buy smaller, more frequent batches.
The EOQ Formula
The formula was developed by Ford W. Harris in 1913 and remains the foundation of modern inventory management:
EOQ = √(2 × D × S / H)
Where:
- D is the annual demand in units.
- S is the fixed ordering cost per order, in dollars.
- H is the holding cost per unit per year, in dollars.
Once you know the EOQ, the supporting figures follow directly:
Orders per year = D / EOQ
Total annual inventory cost = (D / EOQ) × S + (EOQ / 2) × H
The beautiful property of the model is that at the optimal order quantity, your annual ordering cost exactly equals your annual holding cost. You are balancing the two costs on a knife's edge. If those two numbers are far apart in your business, you are either over-ordering or under-ordering relative to your true cost structure.
Examples
Example 1 — A standard retail SKU. A hardware store sells 10,000 units of a fast-moving lightbulb each year. Placing and receiving an order costs $200, and holding one bulb for a year costs $4. Plugging in: EOQ = √(2 × 10,000 × 200 / 4) = √1,000,000 = 1,000 units. That means the store should order 1,000 bulbs about 10 times per year, or roughly every 36 days. Annual ordering cost and annual holding cost are each $2,000, for a total inventory cost of $4,000.
Example 2 — A low-volume, cheap-to-hold item. A boutique orders 5,000 units a year of a small accessory. Each order costs $50 and each unit costs $2 to hold annually. EOQ = √(2 × 5,000 × 50 / 2) = √250,000 = 500 units, with 10 orders per year and a total annual cost of $1,000. The small order cost keeps batch sizes modest even though demand is still substantial.
Example 3 — A high-volume industrial component. A factory uses 1,500,000 units of a fastener each year. Each purchase order costs $100 and holding one unit costs $5 per year. The EOQ works out to about 7,746 units, meaning the factory places roughly 194 orders per year — reordering about every two days — with a combined ordering and holding cost near $38,730. This shows that when demand is enormous, even tiny per-unit holding costs drive frequent, tightly scheduled replenishment.
FAQ
What does EOQ stand for?
EOQ stands for Economic Order Quantity. It is the ideal order size that minimizes the total cost of ordering and holding inventory, balancing the fixed cost of placing orders against the cost of storing stock.
What are the three inputs to the EOQ formula?
The formula needs annual demand (D) in units, the fixed ordering cost per order (S) in dollars, and the holding cost per unit per year (H) in dollars. Together they produce EOQ = √(2 × D × S / H).
How do I estimate my holding cost per unit?
Add up the annual cost of warehouse space, utilities, insurance, taxes, shrinkage, obsolescence, and the interest on capital tied up in stock, then divide by the average number of units you hold. A practical rule of thumb is 20% to 30% of the unit cost per year.
Is EOQ the same as reorder point?
No. EOQ answers "how much should I order?" The reorder point answers "when should I order?" They work together: you use EOQ to size each purchase order and a separate reorder-point calculation (demand during lead time plus safety stock) to decide when to trigger the next order.
What happens if my order cost is very high?
A higher ordering cost (S) increases the EOQ. When placing an order is expensive, it is cheaper to place fewer, larger orders even though that means holding more inventory. Lowering ordering cost — through automation or better supplier terms — is often the most effective way to reduce inventory.
Does EOQ account for quantity discounts?
The basic model assumes a constant unit purchase price. When suppliers offer lower per-unit prices for larger orders, you need an extended EOQ analysis that compares the total cost — including the discounted purchase price — across each price break. This calculator uses the classic no-discount model.
Disclaimer
This EOQ calculator is provided for informational purposes only and does not constitute financial, accounting, or procurement advice. Results are based on the classic Harris-Wilson model and the exact inputs you enter; real-world inventory costs, demand variability, lead times, and supplier discounts are not factored in. Always validate your order quantities against your actual supplier contracts, lead times, and storage constraints, and consult a qualified supply-chain or finance professional before making major purchasing decisions.