Glossary
What is economic order quantity (EOQ)?
Economic order quantity (EOQ) is the order size that minimizes the combined cost of ordering and holding inventory for a given item.
Definition
Every order carries two opposing costs. Order small and often, and you pay ordering costs repeatedly: PO processing, receiving labor, freight minimums. Order large and rarely, and you pay holding costs instead: storage space, tied-up cash, insurance, obsolescence risk. EOQ is the math that finds the bottom of that curve.
The formula needs three inputs: annual demand in units, the cost to place one order, and the annual cost to hold one unit. The output is a suggested order quantity. In practice EOQ works best as a starting point, not a rule. Supplier case packs, price breaks at volume tiers, and shelf space limits all override the pure math, and the inputs are estimates anyway.
Where teams trip: running EOQ on every SKU. The calculation only pays off on items ordered repeatedly in meaningful volume. For a warehouse with 2,000 SKUs, run it on the top hundred by annual spend and round the answer to the nearest case pack. For the rest, a simple reorder point and a sensible order quantity get you most of the benefit without the spreadsheet maintenance.
Formula
EOQ = √((2 x Annual Demand x Cost per Order) / Annual Holding Cost per Unit)
Example
A shop uses 2,400 boxes of nitrile gloves a year, each PO costs $50 to process, and holding one box for a year costs $2. EOQ = √((2 × 2,400 × 50) / 2) = 346, rounded to 350 to match the supplier's case pack of 50.
By Cameron Priest · Co-founder, Order3
Cameron co-founded TradeGecko, the inventory platform acquired by Intuit. He has spent more than a decade building software for the people who run physical stock.
Updated 2026-06-16
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