Understanding Economic Order Quantity (EOQ) in Inventory Management


We will explore the concept of Economic Order Quantity (EOQ), a widely used technique to optimize inventory ordering and minimize costs. Understanding EOQ can help businesses strike a balance between holding excessive inventory and encountering stock outs. Let’s delve into the details.

What is Economic Order Quantity (EOQ)? 

Economic Order Quantity (EOQ) is a formula-based inventory management technique that determines the ideal order quantity for a product, striking a balance between holding costs and ordering costs. The objective of EOQ is to minimize the total cost associated with inventory, including carrying costs and ordering costs.

The Formula: 

The EOQ formula calculates the optimal order quantity by considering the following variables:

  • Demand: The annual demand for the product (in units).
  • Ordering Cost: The cost incurred for placing an order, including administrative costs, transportation, and paperwork.
  • Carrying Cost: The cost associated with holding inventory, including storage, insurance, obsolescence, and depreciation.
  • Holding Cost per Unit: The cost incurred to carry one unit of inventory for a specific period.

The EOQ formula is as follows: 

                                                         EOQ = √((2 * Demand * Ordering Cost) / Holding Cost per Unit)


Let’s illustrate the concept of EOQ with a numerical example. Suppose a retailer experiences an annual demand of 10,000 units for a particular product. The ordering cost per order is $100, and the carrying cost per unit per year is $5.

Using the EOQ formula: EOQ = √((2 * 10,000 * $100) / $5) = √(2,000,000) ≈ 1,414 units (rounded to the nearest whole number)

The retailer should consider ordering approximately 1,414 units per order to minimize the total cost associated with inventory.

Benefits of EOQ: 

Implementing EOQ offers several benefits to businesses, including:

  1. Cost Optimization: EOQ helps businesses strike a balance between holding costs and ordering costs, resulting in minimized overall inventory costs.
  2. Efficient Ordering: By determining the optimal order quantity, EOQ ensures that orders are placed at the right time, preventing excessive stockpiling or stockouts.
  3. Inventory Control: EOQ facilitates better inventory control, allowing businesses to manage stock levels more effectively and avoid overstocking or understocking.
  4. Cash Flow Improvement: Optimizing inventory levels through EOQ helps in managing working capital efficiently and improving cash flow.


Economic Order Quantity (EOQ) is a valuable technique in inventory management, enabling businesses to determine the optimal order quantity that minimizes costs while ensuring adequate stock availability. By implementing EOQ principles, businesses can strike a balance between holding costs and ordering costs, leading to improved efficiency, reduced inventory costs, and better overall inventory control.