Inventory EOQ and Reorder Point formulas: Economic Order Quantity

Minimize total ordering + carrying cost with EOQ

Ordering tiny batches frequently inflates freight and PO fees; ordering massive batches once a year inflates warehouse storage and capital cost. The Wilson Economic Order Quantity formula finds the exact batch size where annual ordering cost equals annual holding cost: EOQ = SQRT((2 * AnnualDemand * OrderCost) / HoldCostPerUnit).

While EOQ tells you HOW MUCH to order (300 units), Reorder Point (ROP = DailyDemand * LeadDays + SafetyStock) tells you WHEN to trigger that PO (at 100 units remaining).

EOQ and Reorder Point formulas

Notice the square-root scaling law: quadrupling OrderCost from $50 to $200 doubles optimal EOQ from 300 to 600 units.

=ROUND(SQRT((2 * A2 * B2) / C2), 0)

Reorder Point (ROP) formula

At 3,600 units over 360 operating days (10/day), a 7-day lead time plus 30 safety stock triggers replenishment at 100 units.

=ROUNDUP((A2 / 360) * D2 + E2, 0)

Inputs and interpretation

The basic EOQ model assumes steady known demand, fixed cost per order, constant annual holding cost per unit, and replenishment without quantity discounts or shortages. Use positive demand, order cost and holding cost. The 360-day demand basis is an explicit example choice: lead time must use the same day convention. Apply reorder points to inventory position (on hand + on order − backorders). Integer rounding, pack sizes and constraints may change the optimum.

Further reading

• Microsoft Support — SQRT function
• MIT OpenCourseWare — Inventory models and EOQ assumptions