Economic Order Quantity Calculator (EOQ)

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Sometimes businesses find difficulty in terms of deciding how much stock they exactly need for a particular product. If you order too much, your holding costs will increase, while if you order too little, you will have stockouts.

But it is not impossible to resolve the issue when you try out our economic order quantity calculator. And do you know the best thing about it? It is free of cost.

All you have to do is collect the data on annual demand, holding, and ordering costs. Now you are all set to calculate the EOQ within a minute with our calculator.

What is Economic Order Quantity (EOQ)

The economic order quantity, or EOQ, is calculating the optimal order quantity that a company should achieve to reduce expenses. The ideal way to analyze the inventory cost is to use a formula that will help the business to lower the warehouse fees, overstock and stockouts costs, or decrease the yearly carrying cost.

In short, the EOQ will help the company to identify the ideal order quality it must have in a more realistic way. Moreover, it helps maintain the cash flow and achieve customer requirements.

Why should you be calculating EOQ?

EOQ provides several advantages helpful for the overall growth of your business. With this method, you can keep costs low while maintaining an effective e-commerce supply chain. So, let’s take a quick look at why you must use our free EOQ calculator to run your business healthily.

Reducing the inventory costs

Keeping extra items in the inventory is directly related to increasing storage costs. The inventory costs also increase in certain situations like ordering, getting the products damage, or never selling. EOQ can help you decide how much you should order to avoid the issue of reordering products with low velocity.

Can help you minimize stockouts

Understanding when and how much you need to order products is vital for businesses and EOQ can help you with that. EOQ helps avoid stockouts by calculating how much you need to sell and reorder over a specific period. Sometimes ordering in small quality can be cost-effective or may bring opposite results. But you can resolve this by measuring EOQ.

Improving the efficiency

You can improve inventory storage and management by calculating EOQ. Sometimes the e-commerce store owners place orders without proper planning, like how much they actually need. Calculating EOQ is a great way to make realistic plans that will be on the basis of cost variables.

What is the economic order quantity formula?

The formula of EOQ is simple and easy to calculate. And you can use our free EOQ calculator to determine the value of your e-commerce stores. The economic order quantity formula is:

EOQ is the— Square root of (2*S*D) / H.

  • S is the = setup or the ordering cost that includes handling or shipping expenses.
  • D is the = Rate of demand. That is the quantity a company sells annually.
  • H is the = carrying or holding cost per unit or year.

How do you calculate Economic Order Quantity?

When a given level of demand exists, calculating the economic order quantity is crucial for determining the standard order quantity so that you can minimize the logistic costs. But to calculate this, you need to understand the components. These are,

  • D = Yearly demanded quantity.
  • S = The costs for the orders (Fixed costs)
  • Q = order volume (per item).
  • i = interest rate
  • H = Holding costs (Variable cost)
  • C = The costs per unit (Variable cost)

The purpose of measuring EOQ is to reduce the ordering cost. And the total cost relies upon the factors such as variable or fixed costs.

The number of orders: This is the division of the quantity demanded by the order volume per product.

So, the number of orders is D / Q.

Ordering cost (S): It is fixed for each unit and does not vary with the number of units.

So, the yearly ordering cost is to collect the data of the ordering number and then multiply it by ordering costs.

It means = D / Q * S

Holding costs (H): Carrying or holding costs are the variable costs that depend upon carrying the products in inventory.

Holding cost per unit is—the interest rate multiplied by the cost per unit. (H = i * C)

Let’s assume the demand for a product is constant. As the inventory quantity depletes with time, more orders are placed to replenish the inventory until it reaches zero.

So, the yearly holding cost will be = Q / 2 * H.

You can calculate the total cost by summing annual ordering and holding costs.

It means Annual Total Cost (TC) = D / Q * S + Q / 2 * H

To determine the EOQ, we will take the first derivative from Q.

So, the economic order quantity (EOQ) is = dTC / dQ = √ (2SD/H)

How do you use the economic order quantity calculator?

Nowadays, with the advancement of technology, there is no need to do your calculation manually. From small business owners to e-commerce marketers—all have started using the economic order quantity calculator to evaluate the optimal order quantity in order to manage the expenses for their businesses.

With our free EOQ calculator, you can determine the value conveniently. And the process is pretty simple. All you have to do is—collect the data on holding and ordering costs and the annual demand in dollars. Now, just put the value in the column and click the calculate button. You can calculate the other numbers also by clicking on the reset button.

Economic Order Quantity Examples

EOQ is essential for analyzing certain factors, such as determining reordering time and expenses for placing orders and storing products. Let’s take an example to understand how this EOQ works,

Let’s assume you are running a clothing shop, and you can sell 1000 pairs of coats every year. And it will cost you $5 to carry the items in inventory per year, and the cost of placing the order is $2.

Now, the EOQ formula is: √ (2SD/H) = √ (2 * 1000 * 2) / 5 = 28.28 = 28.3 (approx).

  • D = 1,000 pairs of coats
  • S = $ 2 (order cost)
  • H = $ 5 (holding cost)

So, from the above result, you can estimate that the optimal order size to manage the expenses and fulfill the customer need is slightly above 28 pairs of coats.

What are the components of Economic Order Quantity?

Measuring the economic order quantity is not complicated, but you must know the three major parameters to understand the whole thing. To get an accurate result, you have to determine the order costs, holding costs, and annual demands related to selling each product.

Annual demand

As the name suggests, the annual demand is the customers’ requirements for a specific item you receive each year. Analyzing the demand rate is simple. And it needs to check a few parameters, such as checking data like purchasing orders, turnover ratio, and reorder points.

With this data, you will get a good understanding of the number of units a company sells every year, which will ultimately lead to calculating the EOQ with great accuracy.

Holding costs

You can call it a direct cost that comes from storing inventory or retaining rather than spreading your money for other purposes. It is vital to measure the holding cost as it will help you determine how much you are investing in holding the inventory items every year.

Order costs

Ordering cost is the money you invest in purchasing each product. In simple words, it involves all the budget you need for creating and processing an item with the suppliers. For calculating the EOQ, you need to analyze the ordering costs as it involves several important factors and the expenses required to fulfill an order.

Economic Order Quantity Assumptions  

Economic order quantity is an effective metric that is helpful for all types of e-commerce and dropshipping businesses dealing with buying and selling services and goods. Although, you must know the assumptions on which the calculation is based.

The constant demand for the products

According to the EOQ formula, product demand will not change over a certain period. It does not rely upon seasonal or behavioral factors that can change the yearly market demand for a specific item.

Holding and ordering costs will be constant

EOQ assumes the ordering or the holding costs will remain invariable and will not change in any situation. And this is pretty unrealistic. Costing, such as transport charges, employees’ salaries, or warehouse spaces may change with time and directly affect the EOQ calculations.

Have no discounts

According to the third assumption, businesses can’t take discounts. But this is not possible all the time. Especially when retailers buy products in bulk, they can expect discounts. So, in these cases, purchasing items in low installments can influence the cost and so the value of EOQ.

Economic Order Quantity Calculator FAQs

Below are frequently asked questions about Economic Order Quantity Calculator

What is EOQ and its formula?

The economic order quantity (EOQ) is the metric that helps businesses determine standard order size and permit them to fulfill customers’ demand without spending excessive amounts. Management of inventory aims to minimize excess stock and hold costs.

The formula of EOQ is: √ (2SD/H)

Is eComBusinessHub’s Economic Order Quantity Calculator Free To Use?

Yes, absolutely. You can use this free tool to determine the EOQ, which helps balance inventory costs. It is a big asset for any business to meet customers’ demands. And calculating it is pretty simple—you can do it by following some easy steps.

Why is EOQ calculated?

It is crucial regulating the inventory for every e-commerce store and dropshipping business. Without this, the company will not understand how much stock it should hold when the demand is low and when the demand is too high. Both situations may create a loss for the business.

How do you calculate EOQ in Excel?

You can easily calculate EOQ on an excel template using the same formula you do while using the calculator. All you have to do is use the three data annual demand, holding, and ordering cost and then calculate the value on an excel template.

Why should companies use EOQ?

EOQ is essential to maintain the cash flow of any company. Using this formula, a business can manage its inventory balance and control how much cash it has locked up. It is vital to fulfill customer needs and run any business successfully.

What company uses EOQ?

Many top-rated companies, including McDonald’s Corporation, apply the EOQ formula to analyze the ideal order quantity. In short, this method is beneficial for companies to carry huge numbers of stocks that need to manage the inventory.

When should we not use EOQ?

It does not take current inventory levels into account in the EOQ model. Your original EOQ formula may no longer recommend ordering the same quantity with your next order if your demand drops between orders. So, maintaining consistency is necessary in order to use EOQ, which is sometimes pretty unrealistic.

Is Economic Order Quantity useful for dropshippers?

The EOQ is beneficial for drop shippers in terms of identifying the ideal order quantity that will save a lot of money in warehouse spaces and logistics.