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Economic Order Quantity or Economic Order Quantity Optimization is a Term describing the calculation of the optimal ordering quantity for replenishment orders and the Practice to optimize ordering quantities. The Economic Order Quantity model balances inventory costs with ordering costs.

Use Cases

• Determining reordering quantities for production materials
• In Retail: Determining optimal ordering quantities

Calculation

Economic Order Quantity
=	√   2 × D × C o C h

where

• D = Annual demand (in UoM)
• C _o = Ordering costs per order (in Currency)
• C _h = Annual inventory holding cost (in Currency)

Alternative names for Economic Order Quantity include: Optimal Order Quantity.

Notes

Benefits of Economic Order Quantity

• The model limits the impact of errors in cost and demand estimates.

Criticisms of Economic Order Quantity

• The model assumes demand during the year is constant, supplier lead-time is constant and products ordered are delivered in full.
• The model assumes the cost of ordering is a flat fee. Most use cases show substantially higher cost per order for small quantities.
• The model assumes the cost of ordering (C _o ) is a substantial cost element. With modern ordering methods these cost are no longer substantial; making the Economic Order Quantity calculation less relevant. Consider replacing Ordering costs per order with order volume discount.

Use with care: OpenReference recognizes this as an outdated Practice.

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Economic Order Quantity