What is the difference between EOQ and MOQ?

EOQ is the order size you calculate to balance ordering and holding costs. MOQ is the minimum quantity the supplier accepts. When the MOQ is higher, you order the MOQ.

Is EOQ still useful today?

Yes, as a starting point for order sizes on items with steady demand. It works best alongside current lead times, reorder points and supplier constraints.

What is a typical holding cost?

Many companies use 20 to 30 percent of the unit cost per year, covering capital, storage, insurance and obsolescence. Use your own figures when you have them.

Glossary

What is economic order quantity (EOQ)? Formula and example

Economic order quantity (EOQ): Economic order quantity (EOQ) is the order size that minimizes the total cost of ordering and holding stock for an item.

EOQ = square root of (2 x annual demand x cost per order / annual holding cost per unit)

By Roufaida Bouchamha, founder

The definition

Economic order quantity (EOQ) is a classic inventory formula that answers one question: how much should we order each time? Ordering often in small lots keeps stock low but multiplies the cost of placing and receiving orders. Ordering rarely in large lots saves on orders but ties up cash in stock. EOQ is the quantity where the two costs balance.

The formula

D: annual demand in units.
S: cost of placing and receiving one order (purchasing time, receiving, inspection, invoice processing).
H: cost of holding one unit for a year, often 20 to 30 percent of the unit cost (capital, storage, insurance, obsolescence).

EOQ = square root of (2 x D x S / H). At that quantity, the yearly ordering cost and the yearly holding cost are equal, and their sum is at its lowest.

Worked example, illustrative

A part is used at 12,000 units a year. Each order costs $60 to place and receive. The unit cost is $8 and holding cost is 25 percent a year, so H is $2 per unit per year.

EOQ = square root of (2 x 12,000 x 60 / 2) = square root of 720,000, about 849 units.
That is about 14 orders a year, one every 26 days or so.
Yearly ordering cost: about 14 x $60 = $848. Yearly holding cost: 849 / 2 x $2 = $849. The two are equal, as the formula intends.

EOQ in real life: the limits

The supplier decides the floor. If the minimum order quantity is above the EOQ, you order the MOQ.
Demand is not flat. EOQ assumes steady usage. For lumpy or seasonal items, recompute it more often or use it only as a guide.
Price breaks change the answer. A volume discount can justify ordering more than the EOQ; compare total cost at each break.
The inputs are estimates. The formula is forgiving: an EOQ off by 20 percent changes total cost by only a few percent. Wrong lead times or stock records do far more damage.
EOQ is about how much, not when. The reorder point and safety stock decide when to order. Both depend on a current lead time.

How WERISCO helps

WERISCO does not calculate order quantities or change them in your ERP. It shows parts that will run short, ranked by days of cover, value held above your own target levels item by item, and where reorder points were set for lead times your suppliers no longer quote, from your ERP or your exports. Your team decides what to change.

Questions people ask

What is the EOQ formula?: EOQ = square root of (2 x annual demand x cost per order / annual holding cost per unit).
What is the difference between EOQ and MOQ?: EOQ is the order size you calculate to balance ordering and holding costs. MOQ is the minimum quantity the supplier accepts. When the MOQ is higher, you order the MOQ.
Is EOQ still useful today?: Yes, as a starting point for order sizes on items with steady demand. It works best alongside current lead times, reorder points and supplier constraints.
What is a typical holding cost?: Many companies use 20 to 30 percent of the unit cost per year, covering capital, storage, insurance and obsolescence. Use your own figures when you have them.