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EOQ and reorder point calculator
Two halves of one decision, from the same figures: how much to order, and when to place the order. Ordering little and often costs you in order handling; ordering rarely and large costs you in cash tied up and space. EOQ is the size where those two costs meet.
Arithmetic and general information only — not financial, tax, legal or investment advice.
The two formulas
Economic order quantity — how much to order at a time:
EOQ = √( 2 × annual demand × order cost ÷ holding cost per unit per year )
Reorder point — the stock level at which you place that order:
Reorder point = average daily usage × lead time in days + safety stock
They answer different questions and are often confused. EOQ sets the size of the order. Reorder point sets its timing. Getting the size right and the timing wrong still means running out.
Why the answer is more robust than it looks
Most people stall on the holding cost, because storage, insurance, shrinkage, obsolescence and the cost of tied-up money are all estimates. The square root rescues it: quadrupling an input only doubles the EOQ. A holding cost that is twenty per cent out moves the order quantity by about ten. Use a reasonable figure and get on with it — the formula is forgiving in exactly the place people worry most.
When to ignore it
EOQ assumes steady demand, a known lead time, a fixed cost per order and no volume discounts. Real life interferes:
- Price breaks. If the supplier drops the unit price at 5,000 and EOQ says 3,800, the discount may be worth more than the holding cost. Compare the two totals rather than following the formula.
- Minimum order quantities. If the minimum is above EOQ, the decision has been made for you.
- Seasonality. Annual demand divided evenly across the year describes a business that does not exist in retail.
- Perishable or fast-obsoleting stock. The real holding cost is the write-off, which is usually far higher than the storage cost people put in.
Common questions
What is the economic order quantity formula?
EOQ is the square root of (2 times annual demand times the cost of placing one order, divided by the cost of holding one unit for a year). It finds the order size where ordering costs and holding costs are equal, which is the point at which their total is lowest.
What is the reorder point formula?
Reorder point is average daily usage multiplied by the lead time in days, plus safety stock. It answers a different question from EOQ: not how much to order, but when to place the order so that stock does not run out while you wait for it.
How do I work out the cost of holding one unit for a year?
Storage, insurance, shrinkage and obsolescence, plus the cost of the money tied up in it. Many businesses use a percentage of the unit cost as a shortcut. The figure is an estimate either way, which is why EOQ is best read as an order of magnitude rather than a precise answer.
Why does the EOQ answer barely move when I change the inputs?
Because of the square root. Quadrupling the ordering cost only doubles the EOQ, so the result is far less sensitive to your estimates than it looks. That is a strength: it means a rough holding-cost figure still produces a usable order size.
When does EOQ not apply?
When the assumptions it rests on do not hold: steady demand, a known lead time, a fixed cost per order and no volume discounts. Seasonal demand, supplier price breaks at certain quantities, perishable stock and minimum order quantities all override it, and in those cases the formula is a starting point you then argue with.
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The written guide to economic order quantity · Reorder point guide · Inventory turnover