What is EOQ (Economic Order Quantity)?
EOQ is the order quantity that minimizes the combined cost of ordering and holding inventory for an item.
Definition
Economic Order Quantity (EOQ) is a classic inventory model that identifies the order size minimizing total cost, balancing ordering costs (which favor large, infrequent orders) against holding costs (which favor small, frequent ones). The basic formula is the square root of (2 x annual demand x cost per order) divided by the annual holding cost per unit. EOQ assumes constant demand, fixed costs, and instant replenishment, so it is an idealized baseline rather than a precise prescription. Despite its simplifying assumptions, it remains a useful starting point for setting lot sizes for stable, independent-demand items.
How EOQ Works in ERP
ERP systems can store an EOQ as an item's lot-sizing rule or compute it from demand, ordering cost, and carrying-cost parameters. When replenishment is triggered, the planning engine uses the EOQ to size the suggested order rather than ordering only the shortage quantity. Some systems also apply rounding to supplier pack sizes, minimum order quantities, or shelf-life constraints on top of the raw EOQ value.
ERP Vendors with Strong EOQ
Frequently Asked Questions
What are the main limitations of EOQ?
EOQ assumes demand is constant and known, that ordering and holding costs are fixed, and that orders arrive instantly and in full. Real supply chains have variable demand, quantity discounts, capacity limits, and lead times that break these assumptions. As a result EOQ is best treated as a guideline that is then adjusted for pack sizes, minimums, and discounts.
How does EOQ relate to lot sizing in MRP?
EOQ is one of several lot-sizing rules an ERP can apply when MRP generates planned orders. Alternatives include lot-for-lot, fixed order quantity, and period-of-supply methods. EOQ is most appropriate for items with steady demand where ordering and carrying costs are well understood.