Economic Order Quantity (EOQ) is the order size that minimizes the combined cost of ordering inventory and holding it — the point where the cost of placing more frequent, smaller orders and the cost of storing fewer, larger ones balance out. The classic formula:
EOQ = √(2DS ÷ H)
Where D is annual demand in units, S is the fixed cost of placing one order, and H is the annual holding cost per unit. The result is the order quantity where total cost — ordering plus holding — is lowest.
Why does order size have an optimal point at all?
| Order size |
Ordering cost |
Holding cost |
| Small, frequent orders |
High — each order carries the same fixed cost, so more orders means more total fixed cost |
Low — less average inventory sitting in the warehouse at any time |
| Large, infrequent orders |
Low — fewer orders means the fixed cost is paid less often |
High — more average inventory tied up in storage and cash |
The two costs move in opposite directions as order size changes, which is exactly why a minimum exists in between rather than at either extreme — EOQ is simply the arithmetic that finds it.
What goes into ordering cost and holding cost?
- Ordering cost (S): the fixed cost incurred each time an order is placed — purchasing admin time, customs brokerage and clearance fees per shipment, receiving labor, and any per-shipment freight minimums. It stays roughly constant whether the order is 500 units or 5,000.
- Holding cost (H): the annual cost of keeping one unit in stock — warehouse space, insurance, handling, capital tied up in unsold inventory, and shrinkage or obsolescence risk. It's usually expressed as a percentage of unit cost per year, commonly somewhere in the 15–30% range depending on the business and category.
Why does EOQ get more complicated for cross-border brands?
The textbook formula assumes a fixed, known ordering cost — and for a brand importing from overseas, that assumption breaks down fastest. A domestic reorder has one clear cost; an international order carries customs duty, brokerage fees, and freight that varies by container fill rate, so the "S" in the formula is really a range, not a constant. Longer international lead times also push up the safety stock sitting alongside the EOQ-driven cycle stock, which changes the effective holding cost the calculation should really use. EOQ still points in the right direction — it just needs real landed-cost inputs, not textbook constants, to be useful for an importer.
EOQ vs. minimum order quantity vs. reorder point
| Term |
What it answers |
| EOQ |
"How much should I order, given my costs?" — a cost-minimization calculation |
| Minimum order quantity (MOQ) |
"How much will the supplier let me order?" — a supplier-imposed constraint, not a calculation |
| Reorder point |
"When should I order?" — expected demand during lead time plus safety stock |
In practice, the actual order quantity is often whichever is larger of EOQ and the supplier's MOQ — the calculation tells you the ideal, the supplier sets the floor.
What do brands get wrong with EOQ?
- Treating it as a hard rule instead of a starting point. EOQ assumes constant demand and constant costs, which rarely holds exactly — it's a reasonable default to adjust, not a number to follow blindly against a supplier's MOQ or a genuine demand spike.
- Using a rough holding cost estimate. Holding cost is easy to underestimate if it only counts warehouse rent and skips capital cost, insurance, and shrinkage — an underestimated H pushes the calculated EOQ artificially high.
- Ignoring container economics. For imported goods, ordering slightly above or below a full container load can change per-unit freight cost more than the EOQ formula's assumptions account for — container fill rate deserves its own check alongside the calculation.
- Applying one EOQ across every market. Ordering cost and lead time differ per destination, so the same SKU can have a genuinely different optimal order quantity depending on which market it's being ordered into.
FAQ
What is the EOQ formula?
EOQ = the square root of (2 × annual demand × ordering cost per order, divided by annual holding cost per unit). It calculates the order quantity where total ordering cost and total holding cost are lowest combined.
What's the difference between EOQ and minimum order quantity?
EOQ is a calculated ideal order size based on your own costs. MOQ is a constraint the supplier imposes, independent of your costs. In practice, the actual order is usually whichever is larger — MOQ sets a floor that EOQ math can't go below.
Does EOQ work for imported inventory?
The underlying logic still applies, but the inputs need real landed-cost data — ordering cost that reflects customs and brokerage, and holding cost that accounts for longer international lead times and the safety stock they require — rather than the textbook version's constant assumptions.
Getting the real ordering and holding costs behind EOQ right — landed cost, lead times, container economics — is part of the inventory operation eBrands runs for every brand we manage. See how we operate inventory and fulfillment end to end.
