Economic Order Quantity (EOQ) Formula & Definition

Businesses re-order inventory based off of the needs of the current business situation; if there is more expected demand coming, the order will be larger. Using an EOQ or Economic Order Quantity formula can help accurately identify the ideal amount to order and pay for more product.

Using the EOQ can impact savings in multiple areas of the supply chain for a business, from warehousing/storage costs to the shipping costs of actually receiving the order.

What Is EOQ?

EOQ is the optimum size an order should be. The EOQ is used to minimize the extra costs involved when re-ordering inventory including storage and transportation costs.

Benefits Of Calculating EOQ

Lowering Storage Costs

Storing extraneous amounts of inventory can increase rent charges and warehousing fees. Calculating the ideal economic order quantity can minimize these costs by ordering the closest ideal amount of inventory for the anticipated sales window.

Minimize Stockouts

Running out of available inventory to be sold is a double-negative situation for companies not using the EOQ formula—the loss of current customers looking for inventory/products to buy, and the loss of future customers from even considering your products because they don’t know when they will be able to purchase them.

Finding the Economic Order Quantity can help avoid these inventory issues entirely. EOQ can help identify the ideal amount of inventory to both satisfy the overall needs of your customer base, as well as prepare for future demand.

Improved Overall Efficiency

“Gut feeling” is essentially a complete guess. When dealing with revenue-impactful decisions, using the EOQ formula will cancel out the guesswork of inventory management and ordering. Storing and managing the ideal amount of inventory, and actually knowing the exact level of inventory you will be purchasing, can reduce logistical costs across the entire logistics process and help better prepare your company for future sales opportunities.

The Three Variables Of Calculating EOQ

1. “H” For Holding Costs

Holding costs (a.k.a. carrying costs) is the total cost of holding inventory. This cost includes both the initial storage and the holding of that inventory for its lifetime in the warehouse/storage facility. Here’s a simple formula to identify your holding costs:

(Storage Costs + Employee Salaries + Opportunity & Depreciation Costs)

Total Value of Annual Inventory

2. “D” For Annual Demand

Simply, how much demand do you get for a product each year? This data can be found from the ordering data of previous years.

3. “S” For Order Costs

Also known as “setup costs,” this variable references how much an order costs per purchase. This is calculated on a per-order basis with shipping and handling costs included.

The Economic Order Quantity Formula

EOQ = Square Root of: (2*S*D) / H

An Example of EOQ

$0.80 in holding costs per unit = H
Demand rate of 15,000 units per year = D
Setup costs equaling $750 = S

Square Root of (2*750*15,000)/.80 = 5,929 units in one order.

Other Factors In Optimizing Inventory

Inventory Tracking (In Real-Time)

Being aware of and monitoring inventory levels can help you identify how much of a product needs to be shipped and streamlines ordering decision-making. The increase in efficiency will also improve stock-related communications (out of inventory notices, reorder points, etc.).

Reorder Points

Setting automatic points to reorder more inventory at a certain threshold can help optimize the ordering process for speed and reaction time to inventory level changes. Inventory management software or a 3PL can make this quite simple.

Safety Stock

At times of random demand spikes, having safety or extra stock to satisfy unexpected demand can be a great asset. Having safety stock during a flash sale or holiday promotional season can help ensure the most sales are made.

Eliminate EOQ Guesswork With Product Fulfillment Solutions

Track Inventory In Real-Time

Product Fulfillment Solutions’ Electronic Data Integrations (EDI) can quickly and easily integrate with your e-commerce platforms, allowing real-time inventory tracking with access to information 24/7. You’ll never have to worry about your inventory counts or shipments. Log in any time of day to monitor and manage real-time inventory and track inventory to manage your products and business.

Optimize Your Safety Stock Levels With On-Demand Warehousing

Whatever your circumstance, Product Fulfillment Solutions can fill the gaps and provide warehouse on-demand services. With on-demand warehouse space, companies are able to avoid fixed costs associated with long-term contracts in exchange for short-term variable costs. This also creates a more agile supply chain that can be adjusted as demand shifts.

Let Their Logistics Experts Study Your Best Workflow

For new products, Product Fulfillment Solutions will conduct time-and-workflow studies to find the perfect balance that maximizes efficiency and minimizes your cost. It’s a win-win. It’s tempting to ask for a standard price list, but these lists often include services you neither want nor need. Our Right Price includes the services and procedures required for your items to arrive safely and intact.

Conclusion

Using the EOQ formula for your ecommerce business improves your inventory management systems. If you’re looking for a more all-encompassing fulfillment partner, Product Fulfillment Solutions provides real-time inventory tracking and warehousing optimization and will conduct its own workflow studies to determine the best logistical processes for your business and ecommerce situation.

EOQ FAQs

What Is EOQ/What Is The EOQ Formula?/How Do You Calculate The EOQ?

E.O.Q. is the economic order quantity, which is the ideal order quantity for a business to minimize costs and space usage and optimize its inventory management. The E.O.Q. formula is:

EOQ = Square Root of: (2*S*D) / H

*Variables for EOQ formula listed here.

Example Of Economic Order Quantity

$0.80 in holding costs per unit = H
Demand rate of 15,000 units per year = D
Setup costs equaling $750 = S

Square Root of (2*750*15,000)/.80 = 5,929 units in one order.

What Companies Use The Economic Order Quantity Formula?

Any business that manages and stores inventory uses the Economic Order Quantity formula.

Want a personalized consultation to discover what 3PL solutions can do for your business? Contact PFS today!