Ecommerce Fulfilment Services

Calculating Economic Order Quantity (EOQ): Formula and How to Guide

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Economic Order Quantity, or EOQ, is a game-changer in inventory management. It’s like your business’s own personal trainer but for stock levels.

EOQ is a formula that helps you figure out the ideal amount of stock to order. Imagine you’re selling Christmas decorations during the Christmas period. You don’t want to run out of baubles, but you also don’t want to have to store your baubles all year round. In business terms, it helps create the ideal order size to minimise costs associated with the business, like storage, with the need to meet customer demand.

Benefits of Using EOQ 

Economic Order Quantity is a tool that can make your business more efficient and cost-effective, helping you find the sweet spot for your inventory levels. By using EOQ, you can cut down on storage costs, reduce the number of orders you need to place, and make sure you’re meeting customer demand.

Cost-Saving

The big win with EOQ is that it can save you money. By finding the ideal order size, you cut down on inventory costs and ordering fees. It’s like finding the best deal on a holiday; you get the most for your money.

Better Inventory Management

EOQ can help you keep just the right amount of stock. This means you’re less likely to run out of products or have too much taking up space. It’s a balance that keeps things running smoothly.

Less Stress

When you know how much to order and when it takes a load off your mind. No more last-minute orders or stress about overstocking. EOQ helps you plan better, making your life easier.

Happy Customers

Getting your stock levels right means you can meet customer demand. When people get what they want, when they want it, they’re more likely to come back. So, EOQ can also help with customer loyalty.

The Economic Order Quantity Formula

So you’re interested in EOQ and want to know how to use it. Luckily, the EOQ formula is easier than you might think, and we’ve put together a handy calculator you can use to save you getting your calculator out.

Economic Order Quantity (EOQ) Calculator

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EOQ:

What is the EOQ Formula?

The Economic Order Quantity formula is:

 EOQ=√(2DS)H

Let’s break down what each letter in the calculation means:

  • D: Annual demand. How much of the product do you expect to sell in a year?
  • S: Ordering cost. The cost per order, including shipping and handling.
  • H: Holding cost. The cost to store one unit for a year, like rent and utilities.

How to Calculate EOQ

Calculating Economic Order Quantity is a bit like candle making. You gather your ingredients—your D, S, and H—and plug them into the formula. The result? The ideal amount of stock to order. Here’s a quick example:

  • Annual demand (D): 1,000 units
  • Cost to place an order (S): £50
  • Annual holding cost per unit (H): £5

Plug these into our calculator, and it’ll work out the following equation: 

EOQ=(2×1,000×50)/5 EOQ=(2×1,000×50)/5 

This gives you an EOQ of about 141 units.

To get the most out of EOQ, make sure your numbers are up-to-date. Old data can throw off your results. Also, if your business has seasonal spikes, you might need to adjust your EOQ during those times.

How Economic Order Quantity Works

Now that you know what Economic Order Quantity is and how to find it using the formula, let’s talk about how to actually use it in your business.

The EOQ model is not just a one-time thing; it’s a process. You start by calculating your EOQ using the formula. Then, you use this number to set your reorder points. This is the stock level that triggers a new order. For example, if your EOQ is 100 units, you might set a reorder point when you have 20 units left. This gives you time to get the new stock in.

  1. Calculate EOQ: Use the formula to find your ideal order size.
  2. Set Reorder Points: Decide the stock level that will trigger a new order.
  3. Monitor Stock: Keep an eye on your inventory levels.
  4. Place Orders: When you hit the reorder point, place a new order.
  5. Review: Regularly check your EOQ and reorder points to make sure they still make sense.

How Do You Apply EOQ?

To make EOQ work for your business, keep your data up to date. If your costs or demand change, you’ll need to recalculate EOQ. You can also use software to track your stock levels and reorder points. This makes the whole process easier and more accurate.

Factors Affecting Economic Order Quantity 

An EOQ formula assumes that the data you provide will be the same the whole year round. However, several things can change your EOQ. The main ones are demand, costs, and seasonality.

  • Demand: If more people want your product, your EOQ will increase. Less demand means a lower EOQ. Keep an eye on demand. Use sales data to spot trends
  • Seasonality: Some businesses sell more at certain times of the year. Think ice cream in summer or coats in winter. This can affect your EOQ.Plan for the seasons. Adjust your EOQ when you know demand will change
  • Bulk Discounts and Fixed Costs: Costs can also affect your EOQ differently. For example, if you get a bulk discount for larger orders, your EOQ might go up to take advantage of the savings. Alternatively, fixed fees like storage costs and handling don’t change, no matter how much you order. These fixed costs can also impact your EOQ, so it’s good to keep them in mind. Watch your costs. If storage or ordering costs change, update your EOQ. Lucky for you, here at Delta Fulfilment, you can benefit from our wide network of couriers, so our shipping and handling costs are never fixed, meaning we can get the best deal for your business.

Seasonal changes can really shake things up. If you sell swimwear, you’ll need a higher EOQ in the summer. But come winter, you’ll want to lower it. So, it’s good to adjust your EOQ based on the season.

Can I use EOQ for all types of products?

Economic Order Quantity is useful for products with steady demand and consistent ordering and holding costs. If your business has seasonal demand or fluctuating costs, you’ll need to adjust your EOQ accordingly.

What is the difference between MOQ and EOQ?

MOQ stands for Minimum Order Quantity, which is the smallest amount of stock a supplier is willing to sell. EOQ, on the other hand, is the ideal order size to minimise costs. MOQ is set by the supplier, while EOQ is calculated based on your own costs and demand.

Ready to Master Your Inventory Management?

If all this talk about EOQ, stock levels, and formulas makes your head spin, why not let us handle it for you? At Delta Fulfilment, we’re pros at this stuff. Using a third-party logistics partner like us means you don’t have to worry about getting your EOQ right—we do it for you. Let us take care of the nitty-gritty as part of our e-commerce order fulfilment services so you can focus on growing your business.

If you’re ready to take the hassle out of inventory management, contact us today for a quote.

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