The EOQ formula
Economic order quantity (EOQ) is the order size that keeps the combined cost of ordering and holding stock as low as possible. Order too little, too often, and ordering costs pile up. Order too much at once, and cash and space are tied up in stock.
EOQ = √(2 × D × S ÷ H)
D = annual usage in units · S = cost per order · H = holding cost per unit per year
With the default figures: D = 36,000 units, S = ₹1,500, and H = 20% of ₹120 = ₹24. EOQ = √(2 × 36,000 × 1,500 ÷ 24) = √4,500,000 ≈ 2,121 units, or about 17 orders a year.
Reorder point and safety stock
Reorder point = daily usage × lead time + safety stock
Daily usage = 36,000 ÷ 300 = 120 units. With a 10-day lead time and 4 days of safety stock (480 units), the reorder point is 120 × 10 + 480 = 1,680 units. When stock falls to 1,680, raise the next order for about 2,121 units.
Safety stock covers delays and demand spikes. Set it from experience: how often has this vendor been late, and by how much? For a worked walkthrough, see our supply chain management guide.
When EOQ needs adjusting
- Minimum order quantities and pack sizes. Round EOQ to what the vendor actually sells.
- Quantity discounts. A bigger order at a lower price can beat EOQ. Compare the total cost at each price break.
- Seasonal or lumpy demand. EOQ assumes steady usage. For order-driven items, plan from the production plan instead (see what is MRP).
- Shelf life. Never order more than you can use before it expires.