What is Economic Order Quantity (EOQ)?
Economic order quantity (EOQ) is the optimal order size that minimizes the total annual cost of ordering and carrying inventory, calculated using a square-root formula that balances fixed ordering costs against per-unit holding costs.
How It Works
- Formula: EOQ = √(2 × D × S / H), where D = annual demand, S = order cost per order, H = holding cost per unit per year.
- Larger EOQ when demand is high or ordering costs are high.
- Smaller EOQ when holding costs (warehouse, insurance, obsolescence) are high.
- Assumes constant demand and lead time — adjust with safety stock in practice.
Saudi Context
Saudi importers using Jeddah Islamic Port or Dammam Port factor sea-freight ordering costs, customs clearance fees, and Saudi Standards (SASO) inspection charges into the order cost S. Holding cost H includes warehouse rent, takaful insurance, and capital tied up at SAIBOR-linked rates.
Example
A Saudi retailer sells 10,000 units annually, with order cost of SAR 500 per order and holding cost of SAR 4 per unit per year. EOQ = √(2 × 10,000 × 500 / 4) = √2,500,000 = 1,581 units per order.