Economic Order Quantity

Economic Order Quantity finds the batch size that balances two opposing costs: placing orders too often and keeping too much inventory for too long. As order quantity rises, ordering costs fall because fewer orders are needed, but holding costs rise because more stock sits in storage. The formula comes from setting these two cost tendencies against each other and choosing the quantity where their combined annual cost is lowest.

Use this when you know the annual demand for an item and can estimate both the fixed cost per order and the yearly cost of holding one unit in stock. It is most useful for inventory planning in retail, manufacturing, and procurement when demand is fairly steady and stock is replenished in batches.

• Using monthly demand or monthly holding cost without converting everything to the same time period
• Treating H as a percentage instead of a cost per unit per year
• Forgetting that EOQ gives the optimal order size, not the number of orders per year