Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula-based inventory model that calculates the optimal order quantity that minimizes total holding and ordering costs. This mathematical approach helps businesses determine the ideal amount of inventory to order at one time by balancing the cost of storing inventory against the cost of placing orders. The classic EOQ formula considers annual demand, fixed ordering costs per purchase order, and annual holding costs per unit to identify the sweet spot that reduces overall inventory expenses.

Why it matters for e-commerce brands

For Shopify and DTC merchants, EOQ provides a data-driven approach to inventory purchasing decisions rather than relying on guesswork or inconsistent ordering patterns. By calculating the optimal order quantity, e-commerce brands can reduce warehouse storage costs, minimize cash tied up in excess inventory, and avoid frequent small orders that rack up shipping and processing fees. This is particularly valuable for brands scaling beyond initial growth stages who need to professionalize their inventory management practices.

Example

A Shopify store selling organic coffee beans sells 10,000 bags annually. Each time they place an order with their supplier, they incur $100 in fixed costs (processing, shipping, quality checks). Storing each bag costs $2 per year in warehouse fees. Using the EOQ formula: √(2 × 10,000 × $100 / $2) = 1,000 bags per order. This means the store should order 1,000 bags at a time, resulting in 10 orders per year. Ordering more would increase storage costs unnecessarily, while ordering less would mean placing orders more frequently and paying higher total ordering costs.

Related terms

• Holding costs (carrying costs)
• Reorder point (ROP)
• Safety stock
• Lead time
• Just-in-time (JIT) inventory