[.blue]Economic Order Quantity (EOQ):[.blue] Definition & formula

A successful business is like a well-oiled machine – every part must work harmoniously.  

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.

Understanding Economic Order Quantity

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.

How does the EOQ benefit your business?

1. Lowering inventory costs

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.

2. Avoiding stock-outs

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.

3. Facilitating decision making

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.

4. Optimising cash flow

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.

The basics of calculating your EOQ

Before diving into the calculation, you'll need the following figures:

• Holding costs: These represent all the expenses tied to maintaining inventory. Think storage fees, labour, insurance, and even product depreciation.
• Demand: This is the yearly expected sales or consumption of your product.
• Order cost: This reflects the expenses of placing each order, such as shipping and administrative costs.

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.

EOQ in a real-world scenario

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.

Factors that influence EOQ

Remember, while helpful, the EOQ formula isn't infallible. Here are some considerations:

• Demand variability: EOQ works best when demand is steady. If demand fluctuates often, your calculations might not be as accurate.
• Bulk discounts: The formula doesn't account for potential discounts when buying in large quantities.
• Variable costs: EOQ assumes costs remain consistent, not factoring in potential changes like seasonality or unforeseen global events.
• Mathematical proficiency: Understanding and applying the formula requires some mathematical know-how. Fortunately, there are many software solutions to help with this.

Quick FAQs

EOQ vs EPQ

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.

EOQ vs MOQ

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.

Reorder point and EOQ

The reorder point indicates when to place a new order with suppliers. This typically happens when stock levels drop to a predetermined amount.

Optimising your inventory with Zendbox

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.