Economic order quantity
Economic order quantity (EOQ) is the order size that minimises combined ordering and holding costs, found where the ordering-cost and carrying-cost curves cross. It answers the question of how much stock to order each time.
See it move
A stationer sells 900 notebooks a year, paying €8 to place an order and €4 to hold one notebook in stock for a year. EOQ = √(2 × 900 × €8 ÷ €4) = √3,600 = 60 units. Ordering 60 at a time means placing 900 ÷ 60 = 15 orders across the year, the order size that minimises combined ordering and holding cost.
The formula
Variables
- Economic order quantity (units per order)
- Annual demand (units per year)
- Ordering cost per order (€)
- Holding cost per unit per year (€)
Finds the order size that minimises the combined annual cost of placing orders and holding stock.
Check yourself
A hardware store sells 1,250 units of a particular drill bit a year. Placing an order costs €24, and it costs €6 to hold one drill bit in stock for a year. Using the EOQ formula, how many units should the store order each time?