Map
Framework

Economic order quantity (EOQ)

The question it answers

A purchasing manager with a steady-selling item wants to know how much to order each time so that ordering cost plus holding cost is as low as possible.

Origin
Harris, 1990; Chopra, 2019, ch. 11; Slack et al., 2022, ch. 13
Diagram type
Process by phase
Level of analysis
Firm
Topics
Supply chain & operationsCorporate finance
Delivery lorry pulling a chain of linked glass boxes, icon for supply chain

Diagram

Economic order quantity (EOQ)

  1. Inputs
  2. Annual demand
  3. Cost per order
  4. Holding cost per unit per year
  5. Calculate
  6. Total cost = ordering cost + holding cost (+ purchase price)
  7. Q* = square root of (2 × demand × ordering cost ÷ holding cost)
  8. Check
  9. Assumes steady demand, fixed lead time, no quantity discount
  10. A small departure from Q* changes total cost little

Pitfalls

Pitfall

Avoid when demand swings strongly or lot discounts apply; the produce-in-house variant uses a different formula.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Chopra, S. (2019) Supply chain management: strategy, planning, and operation (7th global edn). Harlow: Pearson.No DOIpearson.comCited in 4 articles
  2. Harris, F.W. (1990) ‘How many parts to make at once (reprint of the 1913 original)’, Operations Research, 38(6), pp. 947–950.doi:10.1287/opre.38.6.947Source page
  3. Slack, N., Brandon-Jones, A. and Burgess, N. (2022) Operations Management (10th edn). Harlow: Pearson.No DOIpearson.comCited in 3 articles