How much to order, so ordering and holding cost the least together.
Annual demand, cost per order, cost to carry one unit for a year — and the order size where those two costs balance.
Result
- Economic order quantity
- 693 units
- Orders per year
- 17.3
- Days between orders
- 21 days
- Ordering + carrying cost
- ₹31,176.91
Order about 693 units at a time — roughly every 21 days. That is the size where ordering cost and carrying cost together are at their lowest.
Every purchase decision has two costs pulling against each other. Ordering in small lots means placing many orders, and each one costs something real — the requisition, the follow-up, the goods receipt, the invoice matching. Ordering in large lots means fewer orders but more stock sitting on a rack, tying up money and space and slowly deteriorating.
Economic order quantity is the size where those two curves cross: the point at which the money saved by ordering less often is exactly cancelled by the money spent carrying the extra stock. Order more than that and carrying cost dominates; order less and ordering cost does.
The formula is old and the arithmetic is simple. What is not simple is the two inputs it needs — what an order actually costs you to place, and what it costs to hold one unit for a year — because most businesses have never worked either of them out.
The formula
- Economic order quantity
EOQ = √( 2 × Annual demand × Ordering cost ÷ Carrying cost )- Orders per year
Annual demand ÷ EOQ- Days between orders
365 ÷ Orders per year
Working out the two costs the formula needs
Ordering cost is what it costs you to place one order, regardless of its size. Add up the time spent raising the requisition, getting it approved, issuing the purchase order, chasing the supplier, receiving and inspecting the material, and matching the invoice. Divide a month of that effort by the number of orders placed. For most small units it lands somewhere between a few hundred and a couple of thousand rupees.
Carrying cost is what it costs to hold one unit for a year. It is the interest on the money tied up, plus storage, insurance, handling, and an allowance for damage or obsolescence. A common approximation is fifteen to twenty-five percent of the unit's value, though a fast-obsoleting item is far higher and a stable commodity lower.
Where EOQ is the right answer and where it is not
EOQ assumes demand is steady and known, the supplier has no minimum order, the price does not change with quantity, and material never runs out. Those assumptions hold well for consumables and standard components bought regularly, which is where the formula earns its keep.
They hold badly for anything seasonal, anything with a quantity discount that jumps at a threshold, and anything with a supplier minimum above the calculated EOQ. In those cases the answer here is a starting point that then gets adjusted, not a number to order to.
EOQ answers how much, not when
It is worth being clear that this is only half of the purchasing decision. EOQ gives the order size. The reorder level gives the stock position at which that order has to be placed, and it depends on consumption rate and supplier lead time rather than on cost at all.
Both are needed and they are calculated separately. Using one in place of the other is the most common stores-planning mistake there is.
Questions people ask.
What is economic order quantity?
The order size at which the total cost of ordering and the total cost of carrying stock is lowest. Order in larger lots and carrying cost rises; order in smaller lots and ordering cost rises. EOQ is where the two balance.
What is the EOQ formula?
EOQ = the square root of (2 × annual demand × cost per order ÷ carrying cost per unit per year). Demand and carrying cost must be over the same period — both annual is the usual convention.
How do I work out my ordering cost?
Total the effort that goes into one order regardless of its size — requisition, approval, purchase order, follow-up, goods receipt, inspection, invoice matching — and divide a month of that by the number of orders you placed in the month.
How do I work out carrying cost per unit?
Interest on the money tied up, plus storage, insurance, handling and an allowance for damage or obsolescence, for one unit for one year. Fifteen to twenty-five percent of the unit's value is a common approximation.
When should I not use EOQ?
When demand is seasonal rather than steady, when the supplier gives a quantity discount that jumps at a threshold, or when their minimum order is larger than the EOQ. In those cases treat the result as a starting point and adjust it.
Other free tools
Doing this for every item, every day?
A calculator is the right tool once. When it is every item in the store, it belongs in the system that already knows the numbers.