Purchasing Optimization
EOQ Visualizer
See how ordering cost and holding cost balance to determine the economic order quantity.
Economic order quantity
Adjust demand and cost assumptions to move the optimal order quantity.
Ordering cost ≈ holding cost at Q*
EOQ assumes relatively stable demand, no stockouts, and replenishment without quantity constraints.
How economic order quantity works
EOQ estimates the purchase quantity that minimizes the combined annual cost of placing orders and carrying cycle inventory. It is a cost-balancing model, not a demand forecast.
Ordering cost
Smaller orders mean more purchase orders each year. That can increase administrative effort, receiving activity, freight events and other costs associated with placing an order.
Holding cost
Larger orders reduce order frequency but increase average inventory. Holding cost represents the annual cost of carrying those additional units.
The EOQ balance
As order quantity increases, annual ordering cost falls while annual holding cost rises. EOQ is the point where those opposing costs are balanced and total relevant inventory cost is minimized.
When EOQ is useful
EOQ works best for items with reasonably repeatable demand and stable replenishment. Project-specific, highly seasonal, intermittent or minimum-order-constrained items often need a different method.
- D = annual demand in units
- S = cost incurred each time an order is placed
- H = annual holding cost for one unit
- Q* = economic order quantity
With annual demand of 3500 units, an ordering cost of $120 per order, and annual holding cost of $12 per unit, the modeled EOQ is 265 units per order. At that quantity, annual ordering cost and annual holding cost are approximately balanced.