Question 1

What is Economic Order Quantity (EOQ)?

Accepted Answer

EOQ is the optimal order quantity that minimizes total inventory costs — the sum of ordering costs and holding costs. The formula is EOQ = √(2DS/H), where D = annual demand, S = ordering cost per PO, and H = holding cost per unit per year. At EOQ, your ordering costs exactly equal your holding costs, giving you the lowest total cost.

Question 2

What is ordering cost in the EOQ formula?

Accepted Answer

Ordering cost is the total cost of placing one purchase order — not the cost of the goods themselves. It includes: staff time for PO processing ($15-$30), supplier communication, receiving and inspection, quality control checks, payment processing, and any fixed shipping fees. Typical ordering costs range from $25-$100 per PO. Higher ordering costs favor larger, less frequent orders.

Question 3

What is inventory holding cost?

Accepted Answer

Holding cost is the annual cost of storing one unit of inventory. It's typically 20-30% of the unit cost and includes: warehouse rent/space allocation (6-10%), insurance (1-3%), capital cost/opportunity cost (8-15%), shrinkage and obsolescence (2-5%), and handling costs (1-3%). A $15 unit with 25% holding cost has a $3.75/year holding cost. Higher holding costs favor smaller, more frequent orders.

Question 4

Does EOQ work for e-commerce businesses?

Accepted Answer

Yes, but with caveats. EOQ assumes constant demand and instant availability — real e-commerce has seasonal spikes, promotions, and variable lead times. Use EOQ as a starting baseline, then adjust: order more before peak seasons, less during slow periods. Also consider supplier MOQs (minimum order quantities) and volume discounts, which EOQ doesn't account for. Many brands use EOQ for their top 20% of SKUs and simpler rules for the rest.

Question 5

How sensitive is EOQ to changes in inputs?

Accepted Answer

EOQ is relatively robust — the total cost curve is flat near the optimum. Ordering 20% more or less than EOQ typically only increases total costs by 1-2%. This means you don't need perfectly accurate inputs. If your EOQ is 163 units but your supplier requires 200-unit minimums, the cost difference is minimal. The sensitivity table in this calculator shows exactly how costs change at different order quantities.

Order Qty	Orders/yr	Ordering Cost	Holding Cost	Total Cost
164 units	24.4	$1,220	$308	$1,527
246 units	16.3	$813	$461	$1,274
327 unitsEOQ	12.2	$612	$613	$1,225
409 units	9.8	$489	$767	$1,256
491 units	8.1	$407	$921	$1,328
654 units	6.1	$306	$1,226	$1,532

Economic Order Quantity (EOQ) Calculator

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