Economic Order Quantity (EOQ) Explained: Formula, Example, and Best Use Cases

Economic Order Quantity (EOQ) helps businesses figure out the right amount of stock to order, so they can cut costs without running out of products. If you order too much, you tie up money and waste space. If you order too little, you risk stockouts and lost sales. EOQ finds the balance.

This guide explains how EOQ works, what the formula looks like, and how to use it in real life. Whether you’re running a small shop or managing a warehouse, understanding EOQ can help you make smarter inventory decisions.

What Is Economic Order Quantity (EOQ)?

Economic Order Quantity (EOQ) is a simple formula that helps you decide how much stock to order at one time. It’s about finding the order size that reduces both your holding costs (the cost of storing stock) and your ordering costs (like shipping and handling).

By using EOQ, businesses can avoid overstocking, which ties up cash and storage space, and understocking, which leads to stockouts and missed sales. It gives you a number—your ideal order quantity—that keeps your inventory flowing without extra costs.

EOQ works best when your demand is steady and your costs are clear. It’s a basic but useful tool for anyone looking to save money and manage stock more effectively.

The EOQ Formula (with Terms Explained)

The EOQ formula helps you work out the best number of units to order each time. It looks like this:

EOQ = √(2DK / H)

Here’s what each letter means:

• D = Annual demand (how many units you sell in a year)
  
• K = Order cost per purchase (what it costs to place and process one order)
  
• H = Holding cost per unit per year (the cost to store one unit for a year)
  

Put simply, EOQ finds the point where your ordering and holding costs are balanced. It tells you how many units to order to keep costs low and stock flowing.

Example:
If you sell 1,000 units a year, each order costs you $1.50 to place, and it costs $3 to hold one unit for a year, your EOQ would be:

EOQ = √(2 x 1,000 x 1.5 ÷ 3) = 31.6
So you round up and order 32 units at a time.

This way, you order just enough to meet demand without overspending on storage or shipping.

How to Calculate EOQ Step-by-Step

Calculating your Economic Order Quantity (EOQ) starts with knowing three key numbers:

1. Annual demand (D) – How many units you expect to sell in a year.
   
2. Order cost per purchase (K) – What it costs you to place and receive one order (includes things like shipping and admin).
   
3. Holding cost per unit (H) – What it costs to store one unit for a year (includes warehousing, insurance, shrinkage, etc.).
   

Once you have those, use the EOQ formula:

EOQ = √(2 × D × K ÷ H)

Example:
James sells 1,000 t-shirts per year. Each order costs him $1.50 to place, and it costs $3 to store one t-shirt for a year.

• D = 1,000
  
• K = $1.50
  
• H = $3
  

Plug into the formula:

EOQ = √(2 × 1,000 × 1.50 ÷ 3) = √(3,000 ÷ 3) = √1,000 ≈ 31.6

Rounded up, James should order 32 t-shirts per batch.

If he needs 1,000 t-shirts per year, that means he’ll place about 31 orders per year, or roughly one every 12 days.

That’s how EOQ works: it gives you a clear number to guide your ordering decisions. The goal is to stay stocked without overspending.

Benefits of Using EOQ

Using Economic Order Quantity (EOQ) helps businesses take control of inventory costs while keeping products available when customers need them. Here are the key benefits:

• Fewer stockouts – EOQ helps you keep the right amount of stock on hand, reducing the chances of running out during a sales spike.
  
• Lower storage costs – By ordering the right amount at the right time, you avoid paying for space you don’t need.
  
• Less waste – With better timing and order sizes, you reduce the risk of overstocking, spoilage, and damage.
  
• Smarter purchasing decisions – EOQ gives you data you can trust to guide your ordering schedule, instead of relying on guesswork.
  
• Better cash flow – You don’t tie up money in extra stock, so you have more cash available for other areas of the business.
  

EOQ supports a leaner, more efficient inventory process—one that saves money without putting sales at risk.

Limitations of EOQ

While Economic Order Quantity (EOQ) is a helpful tool, it doesn’t work for every situation. The formula is built on a few key assumptions, and when those don’t match your reality, the results can miss the mark.

Here’s what to keep in mind:

• It assumes constant demand – EOQ works best when your sales stay steady all year. If demand spikes or drops, the number won’t reflect what you need.
  
• It overlooks bulk discounts – Many suppliers offer lower prices for larger orders. EOQ doesn’t factor that in, which could lead you to miss out on savings.
  
• It needs clean, accurate data – If your order or holding costs are based on estimates, your EOQ won’t be reliable.
  
• It doesn’t suit every business. For products with short shelf lives or seasonal demand, EOQ can be too basic.
  
• It can cause shortages – If your EOQ is too low or demand increases suddenly, you might run out of stock before the next order arrives.
  

EOQ is a great starting point, but it’s not a one-size-fits-all fix. Use it alongside real data, and adjust it as your business changes.

EOQ vs. EPQ vs. MOQ

It’s easy to mix up EOQ, EPQ, and MOQ. They all relate to ordering stock, but they’re not the same thing. Here’s a simple breakdown:

EOQ (Economic Order Quantity)
This tells you the ideal number of units to order so you can balance ordering costs with storage costs. It’s used when you buy products from suppliers.

EPQ (Economic Production Quantity)
Similar to EOQ, but for businesses that make products instead of buying them. It factors in the rate of production, so it’s used to decide how much to produce at once without driving up costs.

MOQ (Minimum Order Quantity)
This is the smallest amount a supplier is willing to sell you. Even if your EOQ says you only need 30 units, the supplier might require you to buy at least 50.

Key difference:

• EOQ is about what you should order.
  
• EPQ is about what you should produce.
  
• MOQ is about what your supplier requires.
  

Understanding how these terms work together helps you make smarter decisions when buying or producing stock—and avoid costly mistakes.

When EOQ Works Best

Economic Order Quantity (EOQ) works best when your business has steady, predictable demand and clear cost data. If you know how much you sell each year and your ordering and holding costs stay fairly stable, EOQ can give you a reliable order size that saves money and avoids stock issues.

EOQ is also more effective when you’re working with larger volumes. The more units you move and the more orders you place, the more useful the averages in the formula become. That’s why EOQ is a good fit for high-volume products that aren’t seasonal or perishable.

It’s less helpful for items with short shelf lives, fast-changing demand, or big supplier discounts. But if your numbers are solid and your demand is steady, EOQ is a simple way to improve how you manage stock.

How to Start Using EOQ

Getting started with Economic Order Quantity (EOQ) is straightforward if you have access to clean, reliable data. Here’s how to begin:

1. Track your annual demand
   Look at how many units you sell in a year. Focus on actual units sold—not revenue or forecasts.
   
2. Know your order cost
   Calculate what it costs to place and receive one order. Include setup, shipping, admin, and handling fees.
   
3. Find your holding cost per unit
   Work out what it costs to store one item for a year. That includes storage fees, insurance, shrinkage, and lost value.
   
4. Use the EOQ formula
   Plug your numbers into the formula:
   EOQ = √(2 × D × K ÷ H)
   This gives you the order size that minimizes total inventory cost.
   
5. Test and adjust
   Start using your EOQ number, but keep an eye on how well it works. Adjust as demand or costs change.
   
6. Automate with software
   Inventory software can track data, suggest EOQ-based reorder points, and automate your purchase orders—saving time and cutting guesswork.
   

EOQ is most useful when it’s part of your routine. Keep your data updated, review your calculations regularly, and use your EOQ to make smarter stock decisions.

Conclusion

Economic Order Quantity (EOQ) is a powerful yet straightforward tool that helps businesses balance the costs of ordering and holding inventory. By calculating the ideal order size, EOQ lets you avoid spending too much on storage or facing costly stock shortages. While it works best when demand is steady and costs are predictable, understanding EOQ can bring smarter, more cost-effective inventory decisions to any business, whether you’re managing a small shop or a large warehouse. Using EOQ means fewer surprises, better cash flow, and a smoother supply chain.

Mastering EOQ is a simple step toward inventory control that saves money and keeps your business running efficiently.