Variables
Description
What is this formula?
Economic Order Quantity (EOQ) calculates the optimal order size that minimizes the total annual cost of inventory.
The model balances ordering costs against inventory holding costs to determine the most economical replenishment quantity.
When to use it
Use this formula when:
- Managing inventory replenishment.
- Determining purchasing quantities.
- Reducing inventory costs.
- Planning warehouse operations.
- Optimizing supply chain performance.
Example
A company has:
D = 24,000 units/year
S = 50 USD/order
H = 2 USD/unit/year
Formula:
EOQ = √((2DS)/H)
Substitution:
EOQ = √((2×24,000×50)/2)
EOQ = √(1,200,000)
EOQ ≈ 1,095 units
Result:
The optimal order quantity is approximately 1,095 units per order.
Applications
- Inventory management
- Supply chain optimization
- Purchasing management
- Warehouse planning
- Operations management
Note
EOQ is an idealized inventory model that assumes constant demand, constant lead time, no stockouts, and fixed ordering costs. Real-world inventory systems may require additional adjustments for quantity discounts, demand variability, or service-level targets.