Economic Order Quantity (EOQ) tells you how much stock to order to balance demand against holding and ordering costs. Multiply two by order cost by annual demand, divide by holding cost, then take the square root. It works best when demand is steady, and ignores bulk discounts and seasonal cost changes.
In the world of inventory management, the Economic Order Quantity (EOQ) formula ensures that harmony. With countless variables in the supply chain, knowing how to streamline costs without compromising efficiency is paramount. Here's why the EOQ formula is an eCommerce business' best friend.
The EOQ formula helps businesses make informed decisions about their inventory levels. Its main goal? To strike the perfect balance. By using EOQ, you can figure out the ideal amount of stock you should hold at any given time. In doing so, you match supply with demand while minimising storage and shipping costs. Moreover, the EOQ ensures you maintain desired stock levels, so you’re never paying for storage space that isn't needed.
The more stock you have, the higher the costs – and we're not just talking about storage. A larger inventory can lead to increased risks like damage during transportation or items remaining unsold for extended periods.
Every time an item goes out of stock, there's potential lost revenue. With EOQ, you have a clearer understanding of the inventory needed to avoid stock-outs, ensuring you always meet customer demand without wasting money on surplus storage.
Business decisions, especially in eCommerce, are often tough. The EOQ formula offers a dependable method, guiding you to make choices grounded in data, ultimately improving your operations.
For many eCommerce businesses, a significant portion of their assets is tied up in products. By using the EOQ to order and store the optimal amount of goods, you free up cash for other crucial business aspects like marketing or enhancing the customer experience.
Before diving into the calculation, you'll need the following figures:
Using these components, the EOQ formula is simply:
EOQ = (2 x Order Cost x Annual Demand divided by Holding Costs) then find the square root of the result.
Let’s paint a clearer picture. Imagine an order cost of 300 units of currency, a demand of 6,000 products per year, and a holding cost of 0.45 units per product. The EOQ formula for this example is:
EOQ = Square root of ((2 times 300 times 6000) divided by 0.45)
This means your EOQ is 2,828 units.
Remember, while helpful, the EOQ formula isn't infallible. Here are some considerations:
While EOQ focuses on ordering, the Economic Production Quantity (EPQ) zeroes in on production. EPQ determines the best amount to produce at a given time.
Minimum Order Quantity (MOQ) highlights the least number of orders needed for profitability. It's essential for businesses with slim margins that rely on volume.
The reorder point indicates when to place a new order with suppliers. This typically happens when stock levels drop to a predetermined amount.
While understanding and applying the EOQ is crucial, having the right partner to implement these insights can truly make a difference. With Zendbox, you can elevate your eCommerce inventory management to the next level. Our state-of-the-art inventory management system, Zendportal, can help you calculate your EOQ and ensure that you always have the optimal stock levels while minimising overhead costs.
Ready to optimise your inventory? Get started with Zendbox today.
We maximised our inventory performance to reduce stock holding costs and overall billing with the help of Zendbox.
The article’s illustrative example, in units of currency and products.
Gather three figures, then apply the formula.
Add up the cost of keeping stock: storage fees, labour, insurance and product depreciation.
Use expected yearly sales or consumption of the product.
Include the cost of placing each order, such as shipping and administration.
Multiply two by order cost by annual demand, divide by holding cost, then take the square root.
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