EOQ Full Form

What Is EOQ?

EOQ, or economic order quantity, is the order size that keeps your total yearly cost of ordering and holding stock as low as possible. For an Indian trader it weighs two costs that pull in opposite directions: the fixed cost of placing each order, and the cost of interest, space and damage on stock that sits waiting to be sold.

Order small and often, and the paperwork and unloading bills pile up. Order big and rarely, and your cash credit account pays interest on stock that will not move for weeks. The EOQ formula finds the point between the two.

How the EOQ Formula Works

Two costs pulling in opposite directions Yearly cost Lowest total cost Total cost Holding cost Ordering cost EOQ Order size Bigger orders cut ordering cost but raise holding cost. Total cost bottoms out where the two meet, and that order size is the EOQ.

The formula itself is short:

EOQ = √(2 × D × S ÷ H)

Each letter stands for one figure from your own books:

• D is how many units you sell or use in a year
• S is the fixed cost of placing one order, whatever its size
• H is the cost of holding one unit in stock for a year

S is where people go wrong. Only costs that come once per order belong in it, such as raising the purchase entry, checking the e-way bill and paying the unloading crew’s visit fee. Freight charged per bag or per kilo does not, because the year’s total freight bill stays the same whether you order often or rarely. But a truck hired per trip is the opposite case, and that charge belongs in S.

H is mostly the cost of money. Interest on your cash credit limit, or what your own funds could earn elsewhere, usually outweighs godown rent, as the page on carrying cost explains. If you can claim input tax credit, leave GST out of the bag price and out of H. Accounting Standard 2 treats recoverable taxes the same way.

A composition dealer, or a restaurant billing at 5% without credit, cannot claim input tax credit, so GST becomes part of the real cost.

EOQ vs Reorder Level

The two answer different questions. And most stockists need both.

Your reorder level tells you the stock count that should trigger a call to the supplier. The formula then tells you how many to ask for on that call. Add a little safety stock to the reorder level if your supplier’s lead time swings from week to week.

EOQ Example

A building-materials dealer in Ainthapali, Sambalpur, sells about 9,600 bags of cement a year, roughly 185 a week. It pays Rs.338 a bag before GST and claims the credit, so GST stays out of the holding cost.

• S, cost per order: Rs.214 of office time for the purchase entry and e-way bill check, plus Rs.158 for the unloading crew, so Rs.372 (the supplier delivers and charges freight per bag, so no truck cost goes in)
• H, cost per bag per year: Rs.37.18 of interest at 11% on its cash credit, Rs.6.42 of godown and handling, and Rs.4.90 for bags that harden or split, so Rs.48.50

Working it through, 2 × 9,600 × 372 = 71,42,400. Divide by 48.50 to get 1,47,265.98, and the square root of that is 383.75. The answer is 384 bags (about 19 tonnes at 50 kg a bag), which fits on one 20-tonne truck. At that size the year’s ordering and holding cost comes to Rs.18,612, against Rs.23,864 for 800-bag orders.

Note: this is an invented example for illustration only. The dealer, the cement price and every cost figure are made up.

At 384 bags the two costs come out almost equal, which is exactly what the formula predicts. Ordering every two weeks also keeps the cement fresh, since bags left for months lose strength.

When EOQ Helps and When It Breaks

The formula earns its keep on steady, non-perishable lines: cement, rice, cooking oil, stationery, packaging. For those, a two-minute sum can release cash tied up in oversized orders. Across the traders we work with, the costly habit is usually ordering “two or three truckloads because it feels safe” without checking what that stock costs to hold.

EOQ rests on assumptions that are not always true, though:

• Steady demand. Firecrackers before Diwali, umbrellas in the monsoon and wedding-season stock all break this assumption.
• Long shelf life. Paneer, milk and fresh produce can spoil before an EOQ-sized order runs out.
• One price at every size. A bulk discount can make a bigger order cheaper overall, and a minimum order can force one. The formula sees neither.

When any of these does not hold, treat the answer as a starting point and adjust it. A stock inventory template helps you collect a year of usage before you run the formula, and this piece on inventory mistakes retail stores make covers what over-ordering does to a shop.

Get the Demand Figure Your EOQ Needs

The weakest number in the formula is D, your yearly demand, because most owners guess it. For restaurants, Petpooja POSS uses item-wise auto deduction to cut stock as each dish sells and gives day-end inventory reports, so dry-store usage is recorded day by day.

For retail businesses, Petpooja Invoice gives real-time stock tracking and inventory-related reports, so your sales by item are on record to add up into D. It also helps you identify underperforming items to prevent overstock.

Add up last year’s usage for your three biggest lines from your records, run the formula, and see how far your usual order is from the answer.

Frequently Asked Questions