What is EOQ?
Economic Order Quantity is the order size that minimises total inventory cost (ordering cost + holding cost). Formula: EOQ = √(2 × D × S ÷ H), where D = annual demand in units, S = cost per order, H = holding cost per unit per year.
How to use EOQ
- Find annual demand (D) from actual usage.
- Estimate cost per order (S): admin, transport, receiving.
- Estimate holding cost per unit (H): storage, capital, spoilage.
- Calculate EOQ.
- Set a reorder point = daily usage × lead time + safety stock.
EOQ example
D = 12,000 kg of rice a year, S = ₹1,500 per order, H = ₹10 per kg per year. EOQ = √(2 × 12,000 × 1,500 ÷ 10) = √3,600,000 ≈ 1,897 kg. So order about 1,900 kg roughly every 8 weeks.
Limitations
- Assumes steady demand — adjust for seasonality.
- Ignores quantity discounts unless you test them.
- Perishables may need smaller orders than EOQ suggests.
How DOOfy helps
EOQ is only as good as its demand number. AIMOS One provides real usage and lead times from your own data, so order quantities and reorder points can be recalculated as demand shifts.
Frequently asked questions
What are the assumptions of EOQ?
Constant demand, constant lead time, fixed ordering and holding costs, and no stock-outs or quantity discounts.
What is a reorder point?
The stock level at which a new order should be placed — usually daily usage × lead time + safety stock.