EOQ / Economic Order Quantity

Definition

Order quantity balancing ordering and carrying cost assumptions. This reference is designed for practical industrial stores, MRO, production and materials-management environments.

Objective

Estimate a theoretically economical order quantity under simplified cost assumptions.

Scope

Apply the method at item, category, location or plant level as appropriate. The control should connect planning, purchasing, stores transactions, physical verification and management review.

Required Inputs

Annual demand D
ordering/setup cost S
annual holding cost H per unit.

Methodology

Define the business requirement, scope and review period.
Validate item master, consumption, stock and open transaction data.
Calculate or classify using the defined method.
Compare the result with criticality, supplier constraints and future demand.
Assign an action owner, due date and review frequency.
Monitor KPI movement and revise parameters when conditions change.

Formula / Control Logic

EOQ = √(2DS/H).

Worked Industrial Example

For D=12,000 units, S=₹500/order and H=₹20/unit/year, EOQ ≈ 775 units.

Decision Rules

Use EOQ as a reference, not an automatic PO quantity.
Compare with MOQ, shelf life, storage capacity and supplier economics.
Use current cost assumptions.

Industrial Controls

Authorized master-data and parameter changes
ERP transaction discipline and document traceability
Physical verification and reconciliation
Exception reporting with named ownership
Periodic management review of ageing, service and capital exposure

KPIs

Service

Availability, fill rate and stock-out performance.

Accuracy

Book-to-physical reliability and transaction quality.

Capital

Turnover, coverage, ageing, excess and dead stock.

Common Errors

Treating EOQ as mandatory.
Ignoring quantity discounts.
Using monthly demand with annual holding cost without conversion.

Excel / MIS Application

Useful fields: Item Code, Description, UOM, Opening Qty, Receipt Qty, Issue Qty, Closing Qty, Unit Rate, Annual Consumption, Current Stock, Open PO, Lead Time, Safety Stock, ROP, Min, Max, ROQ, ABC, VED, FSN, Ageing, Action.

Management Review Questions

Which items require action now, and why?
Are open orders aligned with actual requirement?
Which exceptions are recurring and what is the root cause?
Which parameter should be changed, and what evidence supports the change?

Related Inventory References

Professional practice: A calculation is a control aid, not a substitute for engineering judgement, approved policy, physical verification or business-risk assessment.