EOQ- Economic Order Quantity

cannot order than more  the economic order quantity .Its  mathematical value arrived with an
cannot order than more  the economic order quantity .Its  mathematical value arrived with an
equation  where values for cost of ordering , carrying cost,  annual total demand  and unit
price is taken into account to arrive at  EOQ .
price is taken into account to arrive at  EOQ .

Some of the definitions of EOQ

EOQ is a mathematical formula designed to minimize the combination of annual holding costs
and ordering costs. There is a lot of hype about just in time inventory systems (JIT), which
achieve smaller inventories through very frequent orders, but frequent ordering can often
result in an over-spending on ordering costs. Even though companies often miscalculate
their ordering costs, which makes frequent ordering seem costly, EOQ is an important tool for
determining what inventory should be.


EOQ stands for Economic Order Quantity. EOQ is basically a level of inventory which will
minimize the cost of holding the inventory and ordering it.While using this framework, it is
assumed that the ordering cost is constant and the rate of demand is also constant. Apart
from that the purchase price and lead time are also fixed. The level of inventory and ordering
and carrying costs are equal while using EOQ.


Here is the formula

E  =SQRT OF 2xMxCo/sxCc


SQRT = Square root of

M= Annual demand

Co = Ordering Cost

Cc = Inventory carrying cost

s = Unit Price

EOQ  can be adjusted in following cases where saving potential are very high or there
operational benefits for  eg .

  • Imported items have to be procured in bulk as entire cycle takes 4-5 months time for

  • Seasonal supply factor - In case of food  commodities the price in harvesting seasons
    are low in comparison to other seasons hence it would  save cost if we buy in bulk
    during these periods.

  • Ordering as per packing : Certain manufacturers give items in pack only hence it would
    better if we buy in that packing configuration.

  • Discount offered in bulk quantities

  • For Perishable items : These items have to  procured as per the shelf life as we cannot
    procure them as per our wish

  • Big discount on  bulk  quantity

purchasing , sourcing , materials management , procurement , buying , purchasing role , purchasing functions
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