Economic Order Quantity (EOQ) is the order size that minimizes total annual inventory cost, balancing ordering cost against carrying cost. The classic formula is EOQ = square root of (2 x annual demand x order cost / carrying cost per unit per year).
Why It Matters
Order too small and purchase spends the year raising POs, chasing vendors, and paying freight on every shipment. Order too big and working capital is tied up in inventory sitting in the warehouse. EOQ finds the sweet spot. For Indian MSMEs with tight cash cycles, running EOQ on top ABC items frees up lakhs of rupees.
Example with Indian Context
A forging unit consumes 60,000 kg of steel rounds per year. Ordering cost (admin + transport) is INR 2,000 per order, and holding cost is INR 15 per kg per year. EOQ = sqrt((2 x 60,000 x 2,000) / 15) = sqrt(16,00,000) = approx 4,000 kg. So the right order size is 4,000 kg, giving 15 orders per year.
Related Terms
How ERPDrive Handles It
ERPDrive calculates suggested EOQ from annual consumption, ordering cost, and carrying cost, and uses it as the default order quantity at ROL trigger. Planners can override EOQ for vendor MOQs or special campaigns.
See It in Your Factory
ERPDrive handles EOQ as a first-class workflow alongside BOM, MRP, quality, and GST. Book a 30-minute demo.
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