Estimate the order quantity that balances ordering costs against annual holding costs.
Result
Calculating the sample result.
EOQ is a classic inventory tool because it frames the tradeoff between buying too often and carrying too much stock. It is especially useful when purchasing teams want a rational default order size.
Inputs
Outputs
Multiply annual demand by ordering cost, double the result, and divide by annual holding cost per unit. Then take the square root to estimate the optimal order size.
EOQ = sqrt((2 x annual demand x ordering cost) / annual holding cost)
Core replenishment policy
A SKU has annual demand of 12,000 units, ordering cost of 45 per purchase order, and annual holding cost of 6 per unit.
Inputs
Steps
Result
No. EOQ estimates how much to order. Pair it with a reorder point to determine when the order should be placed.
It is less reliable when demand is lumpy or highly seasonal. In that case, use a shorter planning horizon or a seasonal purchasing model.
Keep going
Estimate the inventory level that should trigger a new purchase order based on demand, lead time, and safety stock.
Estimate a buffer inventory level using average and maximum demand alongside average and maximum lead time.
Measure how often inventory is sold and replenished over a period using cost of goods sold and average inventory.
