What is economic order quantity?
EOQ answers one question: how many units should you buy in a single order to spend the least on inventory over a year. Without it, buyers tend to order by habit or round numbers, which means overpaying on either ordering costs or holding costs. EOQ turns “how much to order” into a repeatable, data-driven number, and it works alongside other inventory control methods.
Key characteristics
- Two competing costs: EOQ balances ordering costs that rise with order frequency against carrying costs that rise with order size.
- Three inputs, one formula: It uses annual demand (D), ordering or setup cost per order (S), and holding cost per unit per year (H) in EOQ = √(2DS/H).
- Steady-state assumptions: It assumes constant demand, fixed costs, and instant full delivery, so treat the result as a starting point rather than a fixed rule.
- A classic model: EOQ is one of the oldest inventory formulas, first developed in 1913 by production engineer Ford W. Harris.
- Holding cost is real money: APQC reports a measured median of about 10% of average inventory value for annual carrying cost.
Example
Imagine a craft coffee-bean roaster that sells 20,000 bags of beans a year (D = 20,000). Each purchase order costs $100 to place (S = $100), and holding one bag for a year costs $2 (H = $2). Plugging those into the formula gives EOQ = √((2 × 20,000 × 100) / 2) ≈ 1,414 bags per order.
Ordering about 1,414 bags at a time keeps the roaster’s combined ordering and holding costs at their lowest point. You can calculate EOQ step by step with your own numbers.
Order quantity matters at scale. Global inventory distortion from overstocks and out-of-stocks reached $1.7 trillion in 2026, equal to 6.2% of global retail sales.
Related terms
- reorder point: triggers your next EOQ order
- safety stock: buffers the demand swings EOQ ignores
- minimum order quantity: sets a supplier floor above EOQ
- inventory optimization: extends EOQ across your whole catalog
FAQ
What does EOQ tell you?
EOQ tells you the single order size that keeps your combined ordering and holding costs as low as possible over a year.
What is the EOQ formula?
The formula is EOQ = √(2DS/H). Here, D is annual demand, S is the ordering cost per order, and H is the holding cost per unit per year.
What are the limitations of EOQ?
EOQ assumes steady demand, fixed costs, and instant delivery. It works best as a baseline you adjust for real-world factors like seasonality and supplier minimums.
Fishbowl helps small and midsize teams put numbers like EOQ to work with real-time inventory data across purchasing and stock control.