What goes into 'ordering cost'?

Anything you pay per PO regardless of order size: staff time placing the order, fixed freight charges, customs paperwork, supplier setup fees. Not the price of the goods themselves.

How do I estimate 'holding cost per unit per year'?

Add storage cost, insurance, capital cost (opportunity cost of cash tied up), and obsolescence/spoilage allowance. A rule of thumb is 20–30% of the unit cost annually.

Why does the EOQ formula assume constant demand?

Because the underlying math (Wilson, 1934) optimizes a steady-state model. For seasonal or volatile demand, recompute EOQ quarterly or build a planning horizon explicitly.

What if my supplier requires a minimum order quantity higher than EOQ?

Order the minimum. The total-cost curve is flat near the optimum — being above EOQ costs you very little, while ordering below the supplier minimum is impossible.

Is EOQ still useful with just-in-time inventory?

It's the upper-bound model. JIT works toward smaller, more frequent orders — but those tactics only make economic sense if ordering cost is also dramatically lower than EOQ assumes.

How does EOQ relate to reorder point?

EOQ tells you how much to order; reorder point tells you when to place the order. Together they define a full replenishment policy.

EOQ Calculator | Economic Order Quantity — Snad

How does it work?

EOQ (Economic Order Quantity) answers 'how much should I order each time?' Order too little and you pay too many ordering / shipping fees; order too much and you tie up cash in holding cost. The Wilson formula finds the order size where these two costs cross — the lowest total annual inventory cost.

The Wilson formula

Three inputs, one square root, one optimum order size:

EOQ = √( (2 × D × S) ÷ H ) where D = annual demand, S = cost per order, H = holding cost per unit per year

Worked example

Annual demand 1,200 units, ordering cost 10 SAR per order, holding cost 0.60 SAR per unit per year:

EOQ = √((2 × 1,200 × 10) ÷ 0.60) = √40,000 = 200 units
Orders per year = 1,200 ÷ 200 = 6 orders
Total ordering cost = 6 × 10 = 60 SAR
Total holding cost = (200 ÷ 2) × 0.60 = 60 SAR
Total annual inventory cost = 120 SAR — the minimum

Practical tips

Ordering cost is your fixed cost per PO — staff time, freight, customs paperwork. Don't include the goods themselves.
Holding cost ≈ 20–30% of unit cost per year (storage + insurance + obsolescence). Don't underestimate.
EOQ assumes constant demand and instant replenishment — it's a starting point; adjust for seasonality manually.
If the EOQ doesn't fit your supplier's minimum order quantity, round up — the cost curve is gentle near the optimum.
Recompute EOQ each year as demand, ordering, and holding costs change.

Economic Order Quantity (EOQ) Calculator

Do this every day? Snad automates it for you.

How does it work?

The Wilson formula

Worked example

Practical tips

Frequently Asked Questions

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