When EOQ is useful—and when it is not

Understand the trade-off

Ordering small quantities frequently increases ordering, receiving, and transport activity. Ordering large quantities increases average inventory, capital, storage, insurance, shrinkage, and obsolescence exposure. The classic EOQ formula finds the point where the modelled annual ordering and holding costs balance.

The three inputs are annual demand, cost per order, and annual holding cost per unit. Holding cost should reflect the costs that truly change with inventory, not simply a convenient percentage.

Challenge the assumptions

EOQ assumes steady demand and lead time, immediate replenishment, no shortages, stable unit cost, and no quantity discounts. Real purchasing adds supplier MOQs, case packs, container utilisation, expiry, seasonality, capacity, and cash constraints.

Calculate the EOQ, then compare nearby feasible quantities. The annual cost curve around EOQ is often shallow, so a practical pack quantity can be nearly as economical while fitting operations better.

• Round to supplier and logistics units.
• Test discount breaks on total annual cost.
• Cap quantities for shelf life or obsolescence.

Pair EOQ with a timing rule

EOQ suggests how much to order; a reorder point suggests when. Use both only after defining safety stock and inventory position. Track results and revise input costs instead of treating the first answer as permanent.