Economic Order Quantity (EOQ): Formula, Worked Examples and When It Breaks

The trade-off EOQ solves

Two costs pull your order size in opposite directions:

• Ordering costs — everything you pay per order, regardless of size: supplier admin, inbound shipping, goods-in handling, quality checks, your own time raising the PO. Order more often → pay these more often.
• Holding costs — everything you pay per unit sitting in stock: the cost of capital tied up, storage space, insurance, and the risk of damage, theft or obsolescence. Order bigger → hold more → pay more of these.

Small frequent orders minimise holding but maximise ordering costs. Big rare orders do the reverse. Somewhere in between, total cost bottoms out. EOQ is that bottom.

The formula

EOQ = √( 2 × D × S ÷ H )

• D — annual demand, in units
• S — fixed cost per order, in pounds
• H — annual holding cost per unit, in pounds

Worked example

You sell 2,400 units a year of a phone case (D = 2,400). Each order to your supplier costs about £30 in shipping and admin (S = £30). The case costs £5 and you estimate holding costs at 30% of unit cost per year, so H = £1.50.

• EOQ = √(2 × 2,400 × 30 ÷ 1.50)
• EOQ = √(144,000 ÷ 1.50) = √96,000
• EOQ ≈ 310 units per order

At 2,400 units a year, that means ordering roughly every 6–7 weeks (2,400 ÷ 310 ≈ 7.7 orders per year). Total annual cost at this quantity: ordering 7.7 × £30 ≈ £232, holding (310 ÷ 2) × £1.50 ≈ £233. Notice they are almost equal — that balance is the signature of the optimum.

Estimating S and H honestly

The formula is trivial; the inputs are where sellers go wrong.

Ordering cost (S)

Count only costs that scale per order, not per unit:

• Inbound shipping / freight charge per delivery
• Any fixed supplier handling or documentation fees
• Customs brokerage per shipment (if importing)
• Your time: raising the PO, booking in, checking the delivery — costed at what your hour is worth

For a UK seller ordering domestically, S is often £15–£50. For container imports it can be hundreds — which is exactly why import-based businesses order less often in bigger quantities. The formula captures that intuition automatically.

Holding cost (H)

Usually expressed as a percentage of unit cost per year. A defensible build-up for a small UK seller:

25% of unit cost per year is a sensible default if you don't want to build it up line by line. Bulky items (furniture, garden) and fast-obsoleting items (electronics, fashion) sit at the high end; small, durable, evergreen items at the low end.

The good news: the curve is flat

EOQ's most practical property is that total cost is insensitive near the optimum. In the example above, ordering 250 or 400 units instead of the "correct" 310 changes total annual cost by only a few percent. This means:

• Rough estimates of S and H are fine — don't agonise over whether holding cost is 22% or 28%.
• Rounding to convenient quantities (a full carton, a round hundred) is fine.
• The formula's job is to get you in the right region — stopping you ordering 2 weeks or 12 months of stock when 6–7 weeks is right.

When to override EOQ

Quantity discounts

If your supplier offers price breaks (say 5% off at 500 units), EOQ's assumptions break — unit cost now depends on order size. The method: calculate total annual cost (purchase + ordering + holding) at your EOQ and at each discount threshold, and pick the cheapest. Often the discount wins; sometimes the extra holding cost eats it. Ten minutes in a spreadsheet answers it definitively.

Supplier minimums (MOQs)

If the MOQ is above your EOQ, you have no choice — but the comparison is still informative. An MOQ at twice your EOQ is a tolerable inefficiency; an MOQ at eight times your EOQ means you are buying years of stock, and the real decision is whether to stock this product at all.

Seasonal demand

EOQ assumes steady demand. For seasonal products, apply it season-by-season (use the season's demand as D over the season's length) or ignore it in favour of a seasonal buying plan — see our seasonal inventory guide.

Perishables and trend items

Anything with a short shelf life — literal (food, cosmetics) or figurative (trend-driven fashion) — needs an order cap based on sell-by risk, whatever EOQ says. The formula prices obsolescence as a smooth percentage; reality delivers it as a cliff.

EOQ + reorder point = a complete policy

EOQ answers how much; the reorder point answers when. Together they make a replenishment rule you can run on autopilot:

1. When stock falls to the reorder point (lead-time demand + safety stock)…
2. …order the EOQ (rounded to cartons / adjusted for discounts).

This pair, set per SKU and reviewed quarterly, replaces gut-feel ordering entirely — and it is exactly what good inventory software automates. Salync watches your live stock across every channel, alerts you when a SKU hits its reorder point, and suggests the reorder so raising the PO takes one click. You can try it free on the Starter plan.