EOQ — economic order quantity — is the order size that minimises your total cost of ordering and holding stock. Order too little too often and admin/delivery costs pile up; order too much and cash sits in the warehouse. EOQ is the textbook balance point between the two.
EOQ, in plain English
Every order has two competing costs. Placing orders costs money (admin, goods-in, delivery charges), so fewer, bigger orders look attractive. Holding stock also costs money (space, insurance, tied-up cash — typically 15–25% of stock value per year), so smaller, more frequent orders look attractive. EOQ is the quantity where the sum of the two is lowest.
Worked example
A product sells 12,000 units a year. Each order costs about £30 to place and receive. Holding one unit for a year costs £0.80:
EOQ = √(2 × 12,000 × 30 ÷ 0.80) = √900,000 ≈ 949 units — order roughly 950 units at a time, about once a month.
The honest bit: where the 1913 formula creaks
- It assumes steady demand. The model was built for constant, predictable consumption. Wholesale demand is lumpy and seasonal — the "optimal" quantity for the average month can be badly wrong in the peak.
- It ignores MOQs and price breaks. Your supplier doesn't sell 949 units; they sell boxes of 500 with a discount at 5,000. Real ordering is a discrete problem the smooth curve doesn't see.
- It optimises one product in isolation. Your real constraint is usually a shared purchasing budget and container space across hundreds of products — a per-SKU formula can't allocate a shared pot.
- Cost inputs are guesses. Few businesses know their true cost-per-order or holding rate; small input errors move the answer a lot.
EOQ is still a useful sanity check — it tells you the shape of the trade-off. Just don't let a 1913 formula argue with a 2026 supplier contract.
Optimal Chain solves the problem EOQ was reaching for, with the constraints EOQ ignores: give it your actual budget and it plans order quantities across the whole catalogue — every quantity zero or a valid MOQ multiple, the most urgent revenue protected first, to the penny. And when a supplier dangles a bulk discount, the Deal Analyser answers "should I take it?" with holding costs included, plus the break-even price to negotiate from.