Free tool
Economic order quantity (EOQ) calculator
Order too often and you pay for the ordering. Order too rarely and you pay to hold the stock. EOQ is the quantity where those two costs are balanced — and the total cost curve around it is flatter than most people expect.
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The Wilson formula
At the EOQ, annual ordering cost and annual holding cost are exactly equal — which is a useful sanity check on any answer, including this calculator's. If those two rows do not match, something is wrong with the inputs.
Getting the inputs right
EOQ has a reputation for being theoretical. That is almost entirely because people put bad numbers into it.
- Cost per order (S) is the cost of the act of ordering, not the value of the goods. It is the time spent raising and chasing the order, inbound freight if it is charged per shipment, and receiving and put-away labour. For a small business this is often ₹500–₹3,000. It does not include the price of the items — that cost is the same however you split the orders.
- Holding cost (H) is what it costs to keep one unit on a shelf for a year: capital tied up, storage, insurance, shrinkage and obsolescence. A common approximation is 20–30% of the unit cost per year. At a ₹250 unit cost, ₹50–₹75 is a realistic H — and if you are borrowing to fund stock, use your actual cost of capital, not a textbook figure.
- Annual demand (D) should be forward-looking. Last year's number is a starting point, not the answer, for anything that is growing or declining.
The most useful property: the curve is flat
Total cost near the EOQ is remarkably insensitive to the quantity. Ordering 20% away from the optimum raises total cost by under 2%. Being out by 50% costs about 8%.
Two consequences follow, and they matter more than the formula:
- You do not need precise inputs. Rough estimates of S and H land you close enough that the residual error is negligible.
- You can round freely to something practical — a full case, a pallet, a container, or a supplier minimum — and lose almost nothing. Take the EOQ as guidance and round to whatever the real world orders in.
This flatness is why arguing about the third decimal place of holding cost is wasted effort, and why "we cannot calculate S precisely" is not a reason to skip EOQ entirely.
When EOQ does not apply
The model assumes steady demand, a fixed cost per order, constant holding cost and no quantity discounts. Be careful where those break:
- Quantity discounts — if the supplier prices in brackets, compare total cost (purchase + ordering + holding) at the EOQ and at each break point. The right answer is frequently the break point just above the EOQ.
- Perishable or dated stock — an EOQ larger than what you can sell before expiry is wrong regardless of the arithmetic. Cap it at shelf life.
- Sharply seasonal demand — the steady-demand assumption fails. Calculate per season, or use a different model.
- Very slow movers — an EOQ of eleven years' supply is arithmetically correct and commercially absurd.
EOQ answers "how much", not "when"
EOQ and the reorder point are two halves of one policy and neither works alone. EOQ sets the order quantity; the reorder point sets the trigger level. Together they form the classic (Q, R) policy: when stock falls to R, order Q. Set only one and you have half a system.
Questions
What is the EOQ formula?
EOQ = √(2DS/H), where D is annual demand in units, S is the cost of placing one order and H is the cost of holding one unit for a year. At that quantity, annual ordering cost equals annual holding cost.
How do I estimate holding cost?
A common approximation is 20–30% of unit cost per year, covering capital tied up, storage, insurance, shrinkage and obsolescence. If you borrow to fund stock, use your real cost of capital rather than a textbook percentage.
Does the cost per order include the price of the goods?
No. It is the cost of the act of ordering — raising and chasing the order, per-shipment freight, receiving and put-away. The value of the goods is unaffected by how you split the orders.
Do I have to order exactly the EOQ?
No, and you should not try. The total cost curve is very flat near the optimum — being 20% off costs under 2% — so round to a case, pallet or supplier minimum without concern.
What about quantity discounts?
The basic model does not handle them. Compare total cost including purchase price at the EOQ and at each discount break point; the best answer is often the break point just above the EOQ.
Stop recalculating this by hand every month
SmartShelfKart keeps a reorder point on every product and watches it against live stock, so the number you just worked out becomes an alert instead of a spreadsheet you forget to update.