Inventory planning · Step 3 of the chain
How much should I order each time?
Order too little and you pay to place an order again and again; order too much and cash sits on the shelf. The economic order quantity is the lot size where those two costs balance and the total is lowest. Put in your numbers and read your order size below.
Your result
Order quantity that costs the least overall
894 units
Order about 894 units at a time. At that lot size you place roughly 13.4 orders a year (about one every 27 days), and your ordering and holding costs come out balanced, with a total relevant cost of about ₹13,416 a year.
Recommendation: round to a convenient figure near this number; the total-cost curve is flat at the bottom, so a tidy round lot usually costs almost the same as the exact EOQ. Then check it against your supplier's minimum order, any quantity discount, and the space on your shelf before you lock it in.
Your numbers
Ordering cost is what each order costs you regardless of its size. Add up the parts that apply; the total replaces the box above.
Holding cost is what one unit costs you to keep in stock for a year. Choose how you'd like to enter it; the result replaces the box above.
Enter the all-in cost of holding one unit for a year, if you already know it.
A common shortcut: holding cost as a yearly percentage of what the unit is worth. Enter the unit's value and your holding rate.
Orders per year
13.4orders
Time between orders
27days
Total relevant cost
₹13,416/ year
The raw EOQ is rarely a number you can order exactly. Enter your supplier's minimum and any pack or case multiple, and we'll snap the EOQ up to the nearest order you can actually place, and show what that rounding costs.
Why this size, drawn to scale
The amber line is ordering cost, which falls as you order in bigger lots and place fewer orders. The blue line is holding cost, which rises as bigger lots leave more stock sitting on the shelf. The navy curve adds them together; its lowest point, directly above the dashed line, is your economic order quantity, where the two costs are balanced and the total is at its minimum.
Where this number comes from, and where it sits in your planning system
The formula
The economic order quantity is the lot size that minimises the sum of annual ordering cost and annual holding cost:
where D is annual demand in units, S is the cost of placing one order, and H is the cost of holding one unit for a year. At that quantity the annual ordering cost (D ⁄ Q) × S and the annual holding cost (Q ⁄ 2) × H are exactly equal, which is why the total sits at its lowest.
What the result implies
Once you have the order quantity, two figures follow straight from it. The number of orders a year is annual demand divided by the order quantity, D ⁄ Q; the time between orders is the year divided by that. The total relevant cost (the part EOQ actually controls) is ordering cost plus holding cost at that quantity, (D ⁄ Q) × S + (Q ⁄ 2) × H. The unit purchase price itself does not appear in EOQ, because you buy the same annual quantity whatever the lot size; it only matters when a quantity discount changes the price.
Estimating holding cost
Holding cost is the input people most often guess at. A common approach is to take it as a percentage of the item's unit value per year (the holding rate), covering the cost of capital, storage, handling, insurance, and the risk of damage or obsolescence. If a unit is worth ₹100 and you judge your holding rate to be 15% a year, your holding cost is ₹15 per unit per year. Set the rate to reflect your real cost of capital and storage, not a textbook default.
What EOQ assumes, and where it breaks
The formula assumes steady demand, a fixed ordering cost, and a constant unit price, and it ignores quantity discounts, minimum order quantities, shelf life, and storage limits. Its saving grace is that the total-cost curve is flat near the bottom: a sensible round number close to the EOQ usually costs almost the same as the exact figure. Treat EOQ as the starting point, then fit it to your supplier's terms and your shelf.
Where EOQ sits in the chain
EOQ is the third link. The safety stock and reorder point tools decide when to order: the stock level that triggers a replenishment. EOQ decides how much to order once that trigger is hit. Together they form a complete order policy: the reorder point sets the moment, the EOQ sets the lot size. The cost of getting your stock levels wrong is what the Stockout-Cost Estimator puts a number on, and the freight to move each lot is sized over on jit.delivery.
Terms used on this page
- Economic Order Quantity (EOQ)
- The order size that makes total annual ordering and holding cost as low as possible for an item.
- Ordering cost
- The cost of placing and receiving one order regardless of its size: PO processing, supplier follow-up, inward inspection, and the fixed part of inbound freight.
- Holding cost (carrying cost)
- The cost of keeping one unit in stock for a year: capital tied up, storage, handling, insurance, and the risk of damage or obsolescence. Often estimated as a holding rate times unit value.
- Total relevant cost
- The sum of annual ordering and holding cost at a given order quantity, the part of cost that EOQ controls. It excludes the purchase price of the goods themselves.
- Order cycle
- The time between one order and the next: the year divided by the number of orders placed in it.
Common questions
What is economic order quantity (EOQ)?
Economic order quantity is the order size that makes your total ordering and holding cost as low as possible for a given item. Order in smaller lots and you place more orders, so ordering cost climbs; order in bigger lots and more stock sits on the shelf, so holding cost climbs. EOQ is the size where those two pulls balance and the combined cost is at its lowest.
How is EOQ calculated?
EOQ is the square root of (two times annual demand times the cost of placing one order, divided by the cost of holding one unit for a year). Put in units per year, rupees per order, and rupees per unit per year, and the formula returns the order quantity in units. The same inputs also give you how many orders a year that implies and the total relevant cost.
What counts as ordering cost and holding cost?
Ordering cost is what it costs you to place and receive one order regardless of its size: purchase-order processing, supplier follow-up, inward inspection, and the fixed part of inbound freight. Holding cost is what it costs to keep one unit in stock for a year: the cost of capital tied up, storage and handling, insurance, and the risk of damage or obsolescence. Holding cost is usually estimated as a percentage of unit value per year.
I only know my finished-goods sales, not how much of each input I use. How do I get the annual demand?
Convert sales into input demand with a simple usage figure: how many of the input go into one finished unit. Multiply your annual finished-goods volume by that figure and you have the annual demand for the input. For example, a baker who sells 20,000 loaves a year and uses 500 g of flour per loaf needs 10,000 kg of flour a year; that 10,000 is the demand to enter for flour. The calculator works out one input at a time, so run it once per input: change only the usage figure for yeast, salt, packaging, and so on, and recalculate for each. This keeps each result a clean, single-item EOQ, which is the only way the figure is meaningful; there is no combined EOQ across different inputs, because each has its own cost, unit, and supplier.
Is the EOQ always the quantity I should order?
Not blindly. EOQ assumes steady demand, a fixed ordering cost, and a constant unit price, and it deliberately ignores quantity discounts, minimum order quantities, shelf life, and storage limits. Its real value is that the total-cost curve is flat near the bottom, so a sensible round number close to the EOQ usually costs almost the same as the exact figure. Use it as the starting point and then fit it to your supplier terms and your shelf.
How does EOQ relate to safety stock and the reorder point?
They answer different questions. Safety stock and the reorder point decide when to order: the stock level that triggers a replenishment. EOQ decides how much to order once that trigger is hit. The reorder point sets the moment; the EOQ sets the lot size. Together they describe a complete order-up-to policy for the item.
Next in the chain
This is your starting number, not your final answer. Validate it against your own demand, costs, and supplier terms before you act on it.