Economic Order Quantity Calculator (EOQ)

How the Economic Order Quantity Calculator Works and Why It Is Useful

The Economic Order Quantity Calculator (EOQ) uses a proven mathematical model to determine the optimal order size that minimizes the combined cost of ordering and holding inventory. By balancing order cost per purchase with the annual cost of holding stock, EOQ helps businesses reduce total inventory cost while keeping enough stock to meet demand.

The core formula is: EOQ = sqrt((2 × D × S) / H), where D is annual demand, S is order cost per order, and H is holding cost per unit per year. The calculator also reports related metrics that are useful for planning: total annual cost, number of orders per year, and average cycle time in days between orders.

This tool is useful for inventory managers, small business owners, and supply chain professionals who want to optimize purchasing frequency, improve cash flow, and avoid both excess inventory and stockouts when demand and costs are relatively stable.

Formula Used

• EOQ formula: EOQ = sqrt((2 × D × S) / H)
• D: Annual demand in units
• S: Order cost per order (shipping, processing, etc.)
• H: Holding cost per unit per year

How to Use the Calculator (Step-by-Step)

Follow these steps to get accurate and actionable EOQ results:

1. Enter Annual Demand (D). This is the total number of units your business expects to sell or use in one year. Example placeholder: 1000.
2. Enter Order Cost (S). Include all fixed costs per order such as shipping, handling, and administrative expenses. Example placeholder: 50.00.
3. Enter Holding Cost (H). This is the annual cost to hold one unit in inventory, including storage, insurance, depreciation, and opportunity cost. Example placeholder: 10.00.
4. Click Calculate. The calculator will compute:
   • Economic Order Quantity (EOQ)
   • Total Annual Cost (ordering plus holding)
   • Order Frequency per year (D / EOQ)
   • Cycle Time in days (365 / order frequency)
5. Interpret the results. Use EOQ as a target order size. Adjust for practical constraints such as supplier minimums, packaging quantities, or seasonal variations.
6. Reset the fields if you want to test alternative scenarios.

Tips for accurate input:

• Make sure holding cost is annual and per unit. If you only have a carrying cost percentage, multiply that percentage by the unit cost to convert it to H.
• Use consistent units for demand and EOQ. If demand is in units per year, EOQ will be in units per order.
• Round EOQ to the nearest purchase or package size to match supplier constraints.

Practical Examples of Use

Example 1: Small Retailer

Inputs:

• Annual Demand (D) = 1000 units
• Order Cost (S) = 50.00 per order
• Holding Cost (H) = 10.00 per unit per year

Calculation:

• EOQ = sqrt((2 × 1000 × 50) / 10) = sqrt(10000) = 100 units
• Orders per year = D / EOQ = 1000 / 100 = 10 orders
• Cycle time = 365 / 10 = 36.5 days between orders
• Total annual cost = (D / Q) × S + (Q / 2) × H = 10 × 50 + 50 × 10 = 500 + 500 = 1000

Practical takeaway: Ordering 100 units each time minimizes combined ordering and holding costs. If suppliers sell in packs of 25, order four packs to match EOQ.

Example 2: Larger Operation with Low Holding Cost

Inputs:

• Annual Demand (D) = 5000 units
• Order Cost (S) = 75.00 per order
• Holding Cost (H) = 2.00 per unit per year

Calculation:

• EOQ = sqrt((2 × 5000 × 75) / 2) = sqrt(375000) ≈ 612 units
• Orders per year = 5000 / 612 ≈ 8.17, so about 8 orders per year
• Cycle time ≈ 365 / 8.17 ≈ 44.6 days between orders
• Total annual cost ≈ (8.17 × 75) + (306 × 2) ≈ 612.75 + 612 = 1,224.75

Practical takeaway: With low holding cost, larger orders are economical. Round EOQ to the nearest full pallet or shipping unit when placing orders.

Conclusion with Benefits

Using an Economic Order Quantity Calculator streamlines inventory decision making and supports cost-efficient purchasing. Key benefits include:

• Cost Reduction: Minimizes total inventory costs by balancing ordering and holding expenses.
• Inventory Optimization: Helps avoid excess stock and reduces the risk of stockouts by recommending an appropriate order size.
• Operational Efficiency: Improves cash flow and reduces waste or obsolescence by aligning purchase frequency with demand.

Important Note

This calculator assumes constant demand and fixed costs. In practice, consider seasonality, price variations, supplier constraints, lead time variability, and quantity discounts. Use EOQ as a baseline and adjust for real-world factors to create a robust inventory policy.

Start by entering accurate annual demand, realistic order costs, and true holding costs to get the most meaningful EOQ output. Test different scenarios to see how changes in demand, costs, or supplier terms affect your optimal order quantity and overall cost. This ongoing analysis will help you maintain efficient operations and better control inventory-related expenses.