Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) tells you the order size that balances two opposing costs: ordering too often raises setup/order costs, while ordering too much raises storage and capital costs. It comes from minimizing the total annual inventory cost, where ordering cost falls as order size increases and holding cost rises as order size increases. The square-root formula gives the point where these two cost effects are optimally traded off.

Use EOQ when a business repeatedly buys or produces the same item, demand is fairly steady, and each order has a fixed cost. It is especially useful for stock planning in retail, wholesale, manufacturing, and warehouse management.

• Using monthly demand with annual holding cost without converting units to the same time period
• Confusing holding cost per unit per year with the purchase price of the item
• Rounding too early and carrying the rounded value through the whole calculation