{"id":1274,"date":"2024-01-22T14:00:00","date_gmt":"2024-01-22T14:00:00","guid":{"rendered":"https:\/\/www.shipbob.com\/au\/blog\/economic-order-quantity\/"},"modified":"2025-11-20T11:35:33","modified_gmt":"2025-11-20T11:35:33","slug":"economic-order-quantity","status":"publish","type":"blog","link":"https:\/\/www.shipbob.com\/au\/blog\/economic-order-quantity\/","title":{"rendered":"Economic Order Quantity: How EOQ Can Help You Minimise Costs & Save Space"},"content":{"rendered":"\n

Table of Contents<\/p>

** Minutes<\/p><\/div><\/div>\n

What is economic order quantity (EOQ)<\/a>?<\/p>\n\n\n\n

Why you should calculate EOQ<\/a><\/p>\n\n\n\n

Economic order quantity formula walkthrough<\/a><\/p>\n\n\n\n

Economic order quantity calculator<\/a><\/p>\n\n\n\n

Limitations & challenges of the EOQ model\u00a0<\/a><\/p>\n\n\n\n

Other factors that can optimise inventory<\/a><\/p>\n\n\n\n

Take the guesswork out of EOQ with ShipBob<\/a><\/p>\n\n\n\n

Economic order quantity FAQs<\/a><\/p>\n<\/div>\n\n\n\n

When reordering products, many businesses place orders based on what they need at the exact moment. Instead, they should optimise the way they order and pay for products by using the Economic Order Quantity formula (EOQ). <\/p>\n\n\n\n

The EOQ formula helps calculate the optimal order quantity to save money on logistics and ecommerce warehousing<\/a> costs. By calculating EOQ, you\u2019re able to make better decisions on how much product to order in a given period of time.  <\/p>\n\n\n\n

What is economic order quantity (EOQ) <\/h2><\/div>
\n

Economic order quantity is a calculation companies use to figure out the optimal number of inventory units to order, with the goal to minimise the logistics costs<\/a>, warehousing space, stockouts, and overstock costs. The goal of the EOQ model is to determine the ideal quantity of units for an order that enables you to meet demand without over- or under-stocking.  <\/p>\n<\/div><\/section>\n\n\n\n

Why you should calculate EOQ (+ use case examples) <\/h2><\/div>
\n

It\u2019s a great way to determine how much inventory you need to purchase to maintain an efficient ecommerce supply chain<\/a> while keeping costs down.  <\/p>\n\n\n\n

Here are the top benefits of calculating EOQ.  <\/p>\n\n\n\n

Minimise inventory costs & stockouts <\/h3>\n\n\n\n

Having extra items in your inventory can quickly increase storage costs. Inventory costs can also go up depending on how you order, what gets damaged, and what products never sell. If you\u2019re constantly re-ordering products that have low velocity, EOQ can help determine how much to order in a certain time period. <\/p>\n\n\n\n

By calculating how much you need based on how much you sell in a given period of time, you can also avoid stockouts<\/a> without keeping too much inventory on hand<\/a> for too long. Perhaps you\u2019ll discover that ordering in smaller quantities is more cost-effective for your business, or perhaps it\u2019s cheaper to order in bulk. Either way, you won\u2019t know unless you calculate your EOQ.  <\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

Navigate seasonal demand shifts <\/h3>\n\n\n\n

If demand for your brand\u2019s products fluctuates with the seasons, calculating your EOQ for each season can help you balance inventory all year round.  <\/p>\n\n\n\n

Scale efficiently <\/h3>\n\n\n\n

By leveraging the EOQ formula, you can keep just enough inventory on hand to meet demand without getting bogged down by excess stock or deadstock. This makes it much easier for your brand to scale its inventory, fulfilment, and shipping operations, both into new channels and into new demographics and global locations.  <\/p>\n\n\n\n

Women\u2019s health and wellness brand Bloom Nutrition, for example, has leveraged ShipBob\u2019s analytics dashboard to gain visibility into data like EOQs and inventory levels at different locations as they have added new retail partnerships and expanded into new countries. With ShipBob supporting their fulfilment, Bloom has scaled into a 9-figure brand \u2013 and shows no signs of slowing down.  <\/p>\n\n\n\n

\n

\u201cAs you grow your business, nice-to-haves quickly becomes must-haves \u2013 especially when it comes to data and reporting.ShipBob\u2019s dashboard provides us deep visibility into those crucial metrics for inventory, fulfilment, and shipping. It has been phenomenal. <\/em><\/p>\n\n\n\n

With the real-time data we see in our ShipBob dashboard, we can glean insights that tell us which levers to pull and what our costs are across channels, so that we don\u2019t get any surprises on our monthly income statements. Those insights and the reporting that ShipBob offers are definitely a must-have for our business.\u201d<\/em><\/p>\n\n\n\n

Neil Blewitt, SVP of Operations at Bloom Nutrition<\/a> <\/p>\n<\/blockquote>\n\n\n\n

\n
\"\"<\/figure>\n\n\n\n
\"\"<\/figure>\n\n\n\n
\"\"<\/figure>\n<\/figure>\n<\/div><\/section>\n\n\n\n

Economic order quantity formula + example  <\/h2><\/div>
\n

The EOQ formula is made up of three variables:  <\/p>\n\n\n\n

    \n
  1. Holding costs<\/a> (per year, per unit) \u2014 abbreviated \u201cH\u201d <\/li>\n<\/ol>\n\n\n\n
      \n
    1. Demand rate (quantity sold per year) \u2014 abbreviated \u201cD\u201d <\/li>\n<\/ol>\n\n\n\n
        \n
      1. Setup costs (per order, generally including shipping and handling) \u2014 abbreviated \u201cS\u201d <\/li>\n<\/ol>\n\n\n\n

        Using these variables, the formula for economic order quantity is: <\/p>\n\n\n\n

        \n

        EOQ = \u221a [ (2 x S x D) \/ H]<\/strong> <\/p>\n<\/blockquote>\n\n\n\n

        Let\u2019s break down each variable component and go through an example calculation.  <\/p>\n\n\n\n

        Holding costs (H) <\/h3>\n\n\n\n

        Holding cost (also known as carrying costs<\/a>) refers to the total cost of holding inventory. How much do you spend on holding and storing inventory, per unit, per year? In order to properly calculate EOQ, you\u2019ll first need to determine your holding cost.  <\/p>\n\n\n\n

        To calculate your holding costs, use the following formula:  <\/p>\n\n\n\n

        Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) \/ Total Value of Annual Inventory <\/p>\n\n\n\n

        Demand rate (D) <\/h3>\n\n\n\n

        How much demand do you get for a product each year? By looking into historical order data as well as, sales data<\/a>, you can determine the number of units you sell year over year. <\/p>\n\n\n\n

        Setup costs (S) <\/h3>\n\n\n\n

        Also referred to as \u201corder cost,\u201d set up costs refer to how much a purchase order costs. This is done on a per-order basis and includes both the shipping and handling costs. <\/p>\n\n\n\n

        An EOQ example <\/h3>\n\n\n\n

        Let\u2019s say your brand wants to calculate its economic order quantity for it\u2019s most popular product: a vanilla-scented candle. You do some research, and determine that: <\/p>\n\n\n\n

          \n
        • Your holding cost is $0.75 per unit  <\/li>\n\n\n\n
        • Your demand rate is 10,000 units per year <\/li>\n\n\n\n
        • Your setup cost is $500  <\/li>\n<\/ul>\n\n\n\n

          Next, you should plug these variables into the EOQ formula, and perform the calculation like so: <\/p>\n\n\n\n

          EOQ = \u221a [(2 x 500 x 10,000) \/ .75] <\/p>\n\n\n\n

          EOQ = \u221a [10,000,000 \/ .75] <\/p>\n\n\n\n

          EOQ = \u221a 13,333,333.33 <\/p>\n\n\n\n

          EOQ = 3,652 units per order <\/strong><\/p>\n\n\n\n

          This means that the optimal number of inventory units for your brand to purchase in a given restocking order is 3,652 units.  <\/p>\n<\/div><\/section>\n\n\n\n

          Economic order quantity calculator<\/h2>\n\n\n\n
          \n