How to Use the EOQ Calculator

The MetricRig EOQ Calculator determines your optimal order quantity in seconds. Enter three inputs and receive a mathematically optimal reorder size that minimizes your total inventory costs. The calculation runs entirely in your browser—no inventory data is transmitted anywhere.

Enter Annual Demand

Input the total number of units you sell or consume per year. Use historical sales data from your inventory system or POS reports for accuracy. If you're launching a new product, use your best demand forecast.

Enter Order Cost (S)

This is the fixed cost per order—shipping fees, customs duties, receiving labor, and purchase order processing. Include everything you pay each time you place an order, regardless of quantity. For manufacturers, include machine setup costs.

Enter Annual Holding Cost (H)

The cost to store one unit for one year. Include warehouse rent per unit, insurance, obsolescence risk, and opportunity cost of capital tied up in inventory. A common rule of thumb is 20-30% of the unit cost.

Review Your Results

The calculator displays your optimal order quantity, number of orders per year, and total annual inventory cost. Compare this against your current ordering pattern to see potential savings.

The goal is to find the order size where total costs are minimized. Ordering too frequently means excessive order costs. Ordering too infrequently means excessive holding costs. EOQ finds the mathematically optimal balance between these two competing forces.

After calculating EOQ, combine it with your lead time to determine your Reorder Point—the inventory level at which you should place your next order. This ensures stock arrives before you run out while maintaining optimal order sizes.

Why EOQ Matters: The Hidden Cost of Guessing

Most businesses order inventory based on intuition, supplier minimums, or round numbers—not math. A purchasing manager orders "100 units because that's what we always order" without realizing that 147 units might save 15% annually. When you multiply suboptimal ordering across hundreds of SKUs, the waste is staggering.

Consider a distributor ordering printer paper. They place 24 orders per year (bi-weekly) paying $50 per order in shipping and receiving labor. That's $1,200 in ordering costs. If EOQ shows they should order monthly (12 orders), they save $600 per year on this single SKU. Apply that logic to 500 SKUs and the savings become significant.

💡 Key Insight: Companies that implement EOQ-based ordering typically reduce total inventory costs by 10-25% while maintaining or improving service levels.

The Cash Flow Impact

Inventory is cash sitting on shelves. Over-ordering ties up working capital that could fund growth, pay down debt, or earn interest. A business with $500,000 in inventory at 6% cost of capital pays $30,000 per year just to hold that stock—before accounting for warehouse costs, insurance, and obsolescence risk.

EOQ helps right-size inventory levels. By ordering the mathematically optimal quantity, you carry less average inventory while maintaining the same availability. This frees cash for other uses and reduces the hidden costs of excess stock.

Stockout Prevention vs. Over-Stocking

The opposite error—ordering too little—creates stockouts that damage customer relationships. A customer who encounters "out of stock" may never return. Lost sales, expedited shipping to recover from stockouts, and damaged reputation all carry real costs that EOQ helps prevent by establishing consistent, predictable ordering patterns.

EOQ doesn't eliminate safety stock—you still need buffer inventory for demand variability. But it ensures your base ordering pattern is optimal, reducing the need for emergency orders and the chaos that comes with reactive inventory management.

What is Economic Order Quantity (EOQ)?

Economic Order Quantity (EOQ) is the mathematically optimal quantity of inventory to order at one time. It's the order size where the total cost of ordering stock plus the cost of holding stock is minimized. First developed by Ford W. Harris in 1913, it remains one of the most widely used inventory management formulas over a century later.

Every business faces a fundamental inventory dilemma that EOQ solves:

Order too little, too often: You constantly pay setup costs, shipping fees, receiving labor, and administrative time processing many small orders. Each order incurs a fixed cost regardless of size.
Order too much, too rarely: You tie up cash in excess stock, pay for warehouse space you don't need, risk product obsolescence or spoilage, and carry insurance on inventory value that exceeds optimal levels.

EOQ finds the exact mathematical intersection where these two opposing costs are balanced—the order quantity that minimizes total annual inventory cost. The result is a specific number (like "order 147 units at a time") that you can implement immediately in your purchasing workflow.

The elegance of EOQ is its simplicity. With just three inputs—annual demand, order cost, and holding cost—you get a precise answer. No complex forecasting models, no expensive software subscriptions. Just straightforward math that has stood the test of time across manufacturing, retail, distribution, and e-commerce.

The EOQ Formula Explained

The classic Ford W. Harris formula (1913) is:

EOQ = √ [ (2 × D × S) / H ]

D = Annual Demand (units)

S = Order Cost (per order, incl. shipping/setup)

H = Holding Cost (per unit per year)

Breaking Down the Variables

Demand (D)

How many units you sell annually. This must be consistent for EOQ to work well.

Order Cost (S)

Flat fees per order: shipping, customs, admin time, Setup fees.

Holding Cost (H)

Cost to store one unit for a year. Warehousing, insurance, opportunity cost.

Understanding Holding Costs in Depth

Holding cost is often underestimated because it includes hidden expenses beyond just warehouse rent. The true annual holding cost per unit typically ranges from 20% to 40% of the unit's value. This percentage includes warehouse storage space, insurance premiums, climate control and security costs, inventory management labor, shrinkage and theft, obsolescence risk as products age or go out of style, and the opportunity cost of capital tied up in inventory rather than earning returns elsewhere.

For example, if a product costs $50, the annual holding cost per unit might be $10-20 (20-40% of $50). Many businesses make the mistake of only counting warehouse rent in their holding cost calculation, which dramatically underestimates the true carrying cost and leads to over-ordering. When you factor in capital costs—the return you could earn if that money wasn't sitting in inventory—the true cost of holding often doubles.

Calculating Order Cost Accurately

Order cost (S) should include every expense that occurs each time you place an order, regardless of order size. This includes purchase order processing time (your staff's hourly rate multiplied by processing time), shipping and handling charges that are flat-rate per shipment, customs and import fees for international orders, receiving and quality inspection labor at your warehouse, and any setup costs if you're ordering manufactured goods.

A typical order cost for a small e-commerce business might be $25-75 per order, while manufacturers with complex setup requirements might face $200-500 per production run. If you're importing from overseas, don't forget to include customs broker fees, container handling charges, and drayage costs that apply per shipment regardless of container fill level.

Example EOQ Calculation

Let's walk through a real-world example. Suppose you sell 10,000 units of a product annually (D = 10,000). Each order costs $50 in shipping and processing (S = $50). The product costs $20 and your holding rate is 25%, so H = $5 per unit per year.

Plugging into the formula: EOQ = √[(2 × 10,000 × $50) / $5] = √[1,000,000 / 5] = √200,000 = 447 units. Your optimal order size is 447 units. At 10,000 units of annual demand, you'll place about 22 orders per year (10,000 ÷ 447 = 22.4), or roughly one order every 16-17 days.

Compare this to blindly ordering 100 units at a time (100 orders per year, $5,000 in ordering costs) or 1,000 units at a time (10 orders per year, $500 in ordering costs but $2,500 in extra holding costs). The EOQ of 447 units minimizes combined costs at approximately $2,236 per year—the mathematically optimal balance point.

Assumptions & Limitations

EOQ is a theoretical model. It works perfectly in a vacuum, but the real world is messy. Be aware of these assumptions:

Constant Demand

EOQ assumes you sell the same amount every day. If you have seasonality (e.g., Christmas spikes), EOQ will be inaccurate during peaks.

Instant Replenishment

The formula assumes stock arrives instantly. In reality, you have lead times. You must combine EOQ with a Reorder Point.

Static Costs

It doesn't account for bulk discounts. Sometimes buying MORE than the EOQ is worth it if you get a 10% price break.

Working Around EOQ Limitations

Despite these assumptions, EOQ remains valuable when used correctly. For seasonal demand, calculate separate EOQ values for peak and off-peak periods. A retailer might use different order quantities for Q4 holiday season versus Q1-Q3. The key is recognizing that EOQ provides a baseline to optimize from, not a rigid rule to follow blindly.

To handle lead times, combine EOQ with a Reorder Point (ROP) calculation. ROP tells you when to order, while EOQ tells you how much. If your lead time is 14 days and you sell 50 units per day, your Reorder Point is 700 units—when inventory drops to 700, place an EOQ-sized order.

For quantity discounts, compare total costs at EOQ versus the discount threshold. If ordering 500 units (EOQ) costs $10,000 total but ordering 750 units with a 10% discount costs $10,500 total but gives you a 500-unit inventory buffer, the discount may not be worth it. Run the numbers for your specific situation—our calculator helps with these comparisons.

Modern supply chains rarely meet all EOQ assumptions perfectly, but the formula still provides an excellent starting point. Businesses that use EOQ as a foundation—then adjust for real-world factors—consistently outperform those who order based on gut feel or arbitrary round numbers.

When Should You Use EOQ?

EOQ is best suited for products that have "smooth" demand—predictable, steady sales without extreme spikes or troughs. The model assumes you can forecast annual demand with reasonable accuracy, that order and holding costs remain relatively stable, and that you can receive inventory when needed without supply disruptions.

The formula works exceptionally well for commodity-type products with established sales history. If you've been selling an SKU for 12+ months and can predict next year's demand within 20%, EOQ will deliver real cost savings. For new products or highly volatile demand patterns, use EOQ as a starting point but apply judgment and adjust as actual data comes in.

Good Fit

• Core staples (e.g., screws, white t-shirts)
• Raw materials for manufacturing
• Items with predictable sales history
• Products with high holding costs

Bad Fit

• Made-to-order items
• Highly seasonal trend items
• Perishable goods (food, flowers)
• New product launches (no history)

For products that fall between good and bad fit categories, run EOQ calculations but apply judgment. A product with mild seasonality (20-30% swings) can still benefit from EOQ with periodic adjustments, while a product with 400% Christmas spikes needs a different approach. The key is understanding your demand patterns and adjusting the model accordingly.

Many businesses find that applying EOQ to their top 20-30 SKUs (which typically represent 70-80% of volume) delivers massive benefits, even if they use simpler rules for long-tail products. Prioritize optimization where it matters most—high-volume, predictable products with significant holding or ordering costs.

Frequently Asked Questions

What if my supplier has minimum order quantities (MOQ)?▼

If your supplier's MOQ is higher than your calculated EOQ, you have two choices: accept the MOQ and recognize you're carrying more inventory than optimal, or find a supplier with lower minimums. Compare the extra holding costs of ordering at MOQ versus EOQ to quantify the penalty. Sometimes the MOQ penalty is small enough to ignore; other times it's worth switching suppliers or negotiating.

How often should I recalculate EOQ?▼

Recalculate EOQ whenever your inputs change significantly. This means updating when annual demand shifts by more than 20%, when order costs change (new shipping contracts, different suppliers), or when holding costs change (warehouse rent increases, new insurance rates). Most businesses recalculate quarterly or when negotiating new supplier agreements. Stability in your EOQ inputs means you can use the same order quantity for extended periods.

Can I use EOQ for services or digital products?▼

EOQ specifically applies to physical inventory with holding and ordering costs. Digital products have zero holding cost (storing a file costs nearly nothing), so EOQ doesn't apply. However, the underlying concept—balancing fixed costs against variable costs—extends to many business decisions. For services, you might use similar optimization thinking for staffing levels or batch processing.

What's the difference between EOQ and safety stock?▼

EOQ determines your optimal order quantity—how much to order each time. Safety stock is buffer inventory you hold to protect against demand variability and supply delays—extra units beyond what EOQ predicts you need. Safety stock is calculated separately based on demand variance and service level targets. A complete inventory system uses both: EOQ for order sizing and safety stock for risk protection.

Is the EOQ formula still relevant for modern e-commerce?▼

Absolutely. While the formula is 110+ years old, the underlying trade-off between ordering and holding costs is timeless. Modern e-commerce actually makes EOQ more important because faster fulfillment expectations increase holding costs (warehouse space near customers is expensive) and fragmented supply chains increase complexity. The math is the same; only the numbers change. Successful 8-figure sellers use EOQ or similar models to maintain healthy cash flow and competitive margins in an era of razor-thin net profits. The sellers who guess at order quantities consistently leave money on the table—or worse, tie up capital in slow-moving inventory while stockouts lose sales on their best-sellers.

Economic Order Quantity (EOQ): The Complete Guide