Economic Order Quantity: Use EOQ Without Ignoring Real Constraints

Economic order quantity estimates an order size that balances ordering cost with inventory holding cost. It provides a useful baseline when demand and costs are steady. It does not automatically solve supplier minimums, quantity discounts, capacity limits or uncertain lead times.

Define the three inputs carefully

Annual demand D is measured in units per year. Ordering cost S is the fixed cost of placing and receiving one order. Holding cost H is the annual currency cost of keeping one unit in stock, not a percentage entered directly.

If unit cost is $10 and the annual carrying rate is 20%, a simplified annual holding cost is $2 per unit. Check whether that rate includes all intended holding costs before using it.

Calculate the model quantity

EOQ = square root(2 × D × S ÷ H). For annual demand of 10,000 units, $50 per order and $2 annual holding cost per unit, EOQ is square root(500,000), approximately 707.11 units.

OmniCalc displays 708 whole units by rounding up. Its orders-per-year output uses the unrounded EOQ, giving approximately 14.14. If you plan around 708 units, calculate the operational schedule using that chosen quantity.

Compare feasible pack sizes

Ignoring safety stock, relevant annual ordering and cycle-stock holding cost is (D ÷ Q) × S + (Q ÷ 2) × H. At 700 units, this is approximately $714.29 + $700 = $1,414.29.

At 800 units, it is $625 + $800 = $1,425. The difference is only about $10.71 in this simplified model. If suppliers ship only in packs of 100, practical constraints may matter more than the small modeled difference.

Know which costs are outside the comparison

The formula assumes constant unit purchase cost, so purchase spending does not change between quantities and is omitted from the comparison. If a quantity discount changes unit cost, compare purchase cost as well.

The model also assumes stable demand and no stockouts. Safety-stock holding cost, cash limits, spoilage and delivery capacity may change the feasible decision. A mathematically calculated EOQ is not automatically a purchase recommendation.

Connect order size with order timing

Use the EOQ Calculator for order size, the Reorder Point Calculator for the trigger, and the Inventory Carrying Cost Calculator to review annual cost assumptions. Keep the demand and holding-cost periods aligned.

Related reading

Continue with Free Shipping Thresholds: Cover Shipping Without Hiding the Cost for another part of the calculation.