Economic Order Quantity (EOQ)
Also known as: EOQ
Economic order quantity (EOQ) is the order size that minimises the combined cost of ordering and holding inventory.
EOQ is a classic inventory formula that finds the sweet spot between two opposing costs: ordering costs (which fall when you order in larger, less frequent batches) and holding costs (which rise as you carry more stock). The optimal order quantity is the point where these two costs balance and total cost is lowest.
The standard EOQ formula uses annual demand, the cost per order and the annual holding cost per unit. While real purchasing also weighs minimum order quantities, volume discounts and lead-time variability, EOQ remains a useful baseline for setting sensible order sizes on steady, predictable items.
Example
With annual demand of 10,000 units, an ordering cost of RM50 per order and an annual holding cost of RM4 per unit, EOQ works out to 500 units per order — the size that keeps ordering plus holding costs at their combined minimum.
Frequently asked questions
- What is economic order quantity?
- Economic order quantity (EOQ) is the order size that minimises the total of ordering costs and inventory holding costs, giving the most cost-efficient quantity to buy at a time.
- What are the limitations of EOQ?
- EOQ assumes steady demand and stable costs, and ignores volume discounts, minimum order quantities and variable lead times. It is a useful baseline but should be adjusted for real-world purchasing conditions.
Related terms
Inventory Management
Inventory management is the practice of ordering, storing, tracking and controlling stock so that the right items are available at the right time without tying up excess capital.
Read definitionMinimum Order Quantity (MOQ)
Minimum order quantity (MOQ) is the smallest quantity of an item a supplier is willing to sell in a single order.
Read definitionReorder Point
The reorder point is the stock level at which a new order should be placed to replenish an item before it runs out.
Read definitionABC Analysis
ABC analysis is an inventory technique that ranks items into three classes by value or importance so effort and controls focus on what matters most.
Read definitionExplore related across the knowledge graph
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