Inventory planning
Economic Order Quantity (EOQ)
By the Supply Chain Manager team · Updated October 16, 2026
Economic order quantity (EOQ) is the order size that minimizes the combined yearly cost of placing orders and holding inventory for a SKU with steady demand.
Ordering often in small amounts keeps stock low but racks up ordering costs. Ordering rarely in big amounts saves on orders but raises carrying costs. EOQ is the textbook balance point between the two.
The model assumes steady demand, a fixed cost per order and a fixed holding cost per unit. Real distributors rarely meet all three, so treat EOQ as a sensible starting point, then adjust for minimum order quantities, price breaks, pallet sizes and shelf life.
How to calculate EOQ
EOQ = √( 2 × D × S ÷ H ) D = annual demand in units S = cost of placing one order H = cost of holding one unit for a year
EOQ example
Illustrative numbers: annual demand of 5,000 units, $50 to place an order and $2.50 a year to hold one unit. EOQ = √(2 × 5,000 × 50 ÷ 2.5) = √200,000 ≈ 447 units, or roughly 11 orders a year.
Why EOQ matters for distributors
It gives a defensible default order size instead of 'whatever we ordered last time'. For high-volume, stable SKUs, moving towards EOQ can trim both order handling and cash tied up in stock.
Common EOQ mistakes
- Applying EOQ to lumpy or seasonal items where its steady-demand assumption fails.
- Guessing the holding cost. It drives the answer, so estimate it from real storage, capital and obsolescence costs.
- Ignoring supplier MOQs and case packs, which often override the calculated quantity.
Examples on this page use made-up round numbers to show the calculation. They are not benchmarks or results from real businesses.