What is economic order quantity (EOQ)?

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.