Every order quantity is a trade. Order small and often, and you pay for every order: someone’s time, a delivery charge, a goods-in check. Order large and rarely, and you pay to hold the stock: capital, space, risk. The economic order quantity, EOQ, is the quantity where the two costs add up to the least.
It is a hundred-year-old formula with real limits, and it is still the fastest way to find out whether your order sizes are roughly right or badly wrong.
The formula
- D is annual demand in units.
- S is the cost of placing one order, in money: the time to raise, approve, send, receive and match it, plus any fixed delivery charge.
- H is the cost of holding one unit for a year, usually the unit cost multiplied by your carrying cost rate.
A worked example
A product used at 12,000 units a year, costing €8 a unit. Placing an order costs about €40 in time and delivery. The carrying cost rate is 25%, so holding one unit for a year costs €2.
EOQ = √(2 × 12,000 × 40 ÷ 2) = √480,000 ≈ 693 units
At 693 units an order, you order about 17 times a year, every three weeks. The two costs over the year:
| Order quantity | Orders a year | Ordering cost | Average stock | Holding cost | Total |
|---|---|---|---|---|---|
| 300 | 40 | €1,600 | 150 | €300 | €1,900 |
| 693 | 17 | €693 | 346 | €693 | €1,386 |
| 1,500 | 8 | €320 | 750 | €1,500 | €1,820 |
At the EOQ the two costs are equal, which is the property the formula is built on. Notice how flat the total is around the minimum: 600 or 800 units cost almost the same as 693. The formula is for finding the neighbourhood, not the exact number.
Turning it into cover days
Most replenishment systems do not ask for a quantity. They ask how many days of use each order should bring. The conversion is one division:
12,000 a year is about 33 a day, so 693 ÷ 33 ≈ 21 cover days. Set the product to three weeks of cover and the system orders roughly the EOQ every time, adjusting as usage changes.
When to ignore it
The formula assumes steady demand, a fixed cost per order, no quantity discounts and no constraints. Real suppliers break all four.
Minimum order quantities. If the supplier will not ship fewer than 2,000 and the EOQ says 693, the EOQ is irrelevant. The question becomes whether 2,000 is tolerable or a different supplier is cheaper overall.
Price breaks. A 6% discount at 1,000 units is worth €576 a year on this product, more than the extra holding cost of ordering 1,000 instead of 693. Calculate the total with and without the discount; the EOQ is the starting point, not the answer.
Shelf life and space. Perishable goods cannot be ordered in EOQ quantities that outlast them, and a rack that holds 400 units limits the order whatever the formula says.
Pack sizes. Round to the case or pallet. 693 is 29 cases of 24.
Seasonal demand. An annual D hides a product that sells in three months. Use the demand for the season and the EOQ for that period.
Uncertain estimates. Few businesses know their cost per order to the euro. The flat curve helps here: a rough S and H still land you in the right neighbourhood.
What it is good for
Run the formula once across your products, convert to cover days, and compare with what is set. The products ordering every three days with a €40 order cost, and the ones holding six months of a €200 part, stand out immediately. Fix those, then let the formula go. The reorder point decides when to order; the EOQ, turned into cover days, decides how much.
Order quantities in StockBold
StockBold does not calculate an EOQ, and the setting it uses maps onto it directly. Each product has cover days, 30 unless you change them, and the reorder list suggests the quantity that brings stock in hand plus stock on approved orders back up to the reorder point plus the cover days of use. Set cover days to your EOQ divided by daily use, and the suggested quantity follows the EOQ as usage moves.
A supplier minimum is handled the same way: raise the cover days until each order meets it, as the feature page suggests, so the suggestion is never rounded up after the fact. Each product shows the usage behind its figures, and the product turnover report shows which products are holding far more days of stock than their cover days intend.
Read more about reorder and low-stock alerts, or the help guide on where the suggested quantity comes from.