Inventory GuardEOQ Calculator
Find the optimal order quantity that minimizes your total inventory costs using the Economic Order Quantity formula: EOQ = √(2DS/H). Enter your current order quantity to see your potential savings.
The EOQ Formula
What is Economic Order Quantity?
Economic Order Quantity (EOQ) is the mathematically optimal quantity to order from your supplier each time you place a purchase order. It balances two competing cost forces: ordering costs (which decrease as order size increases, since you order less frequently) and holding costs (which increase as order size increases, since you carry more inventory on average).
EOQ finds the exact order quantity where the combined total of both cost types is at its minimum. Order less than EOQ and you're ordering too frequently — paying excessive ordering costs. Order more than EOQ and you're carrying excess inventory — paying excessive holding costs.
The Trade-off EOQ Solves
Imagine you sell 18,000 units per year. You could order 18,000 units once per year (giant order, minimum ordering cost, but massive storage and carrying costs). Or you could order 50 units per week (tiny carrying costs, but constant ordering overhead). EOQ tells you the optimal point between these extremes.
For most Shopify merchants, the EOQ model reveals opportunities to either reduce order frequency (and save on processing costs) or reduce order size (and free up working capital and storage space).
Step-by-Step EOQ Example
A growing Shopify brand sells 18,000 units/year and currently orders 500 units at a time:
- Annual Demand (D): 18,000 units
- Ordering Cost (S): $75 per order
- Holding Cost (H): $8 per unit per year
EOQ = √(2 × 18,000 × $75 ÷ $8) = √337,500 ≈ 581 units
This means the optimal order quantity is 581 units, placed approximately 31 times per year. If they're currently ordering 500 units, they're slightly under EOQ — their holding cost savings are slightly exceeding the extra ordering cost. If they were ordering 1,500 units, they'd be significantly over EOQ and carrying expensive excess inventory.
How to Calculate Your Holding Cost
Holding cost is often the most difficult input to estimate accurately. Here's how to break it down:
| Cost Component | Typical Rate | Notes |
|---|---|---|
| Warehouse/storage | 5–10% of unit value/yr | Rent per sq ft × space per unit |
| Insurance | 1–2% of inventory value/yr | Commercial inventory insurance |
| Obsolescence risk | 2–5% of unit value/yr | Higher for fashion, electronics |
| Cost of capital | 8–15% of unit value/yr | WACC or opportunity cost rate |
| Total (typical) | 20–30% of unit value/yr | Use 25% as starting estimate |
EOQ Limitations and How to Work Around Them
Constant demand assumption
EOQ assumes demand is steady throughout the year. For seasonal businesses, calculate separate EOQs for peak and off-peak seasons, or use a weighted average annual demand that reflects your actual pattern.
Supplier minimum order quantities (MOQs)
If your EOQ is 200 units but your supplier requires a minimum of 500, order 500. EOQ gives you the target; MOQs are the constraint. If the MOQ is significantly higher than your EOQ, it may be worth negotiating or finding an alternative supplier.
Volume discounts
EOQ doesn't account for quantity discount breaks. If ordering above EOQ unlocks a 10% unit cost reduction, the savings on unit cost may outweigh the increase in holding cost. Compare total cost scenarios at and above the discount threshold to decide.
EOQ and monitoring go together: EOQ tells you how much to order. But if inventory data errors cause you to over-order (because your system shows less stock than you actually have) or under-order (because it shows more), you're wasting money. Inventory Guard ensures your inventory count stays accurate, so your EOQ calculations drive real decisions.
EOQ in a Complete Inventory System
EOQ works best as part of an integrated approach:
- Step 1 — Safety Stock: Calculate your buffer inventory to handle demand/supply variability.
- Step 2 — Reorder Point: Calculate when to trigger a purchase order.
- Step 3 — EOQ: Calculate how much to order when you hit the reorder point.
- Step 4 — Monitor: Ensure your inventory counts stay accurate so all three numbers remain meaningful.
EOQ Examples by Industry
Related Resources
Continue your learning — guides, glossary terms, and Academy lessons that connect to this calculator.
Related Terms
Frequently Asked Questions About EOQ
Real questions from inventory managers and Shopify merchants — answered plainly.
Does EOQ account for supplier minimum order quantities?
No. EOQ is a mathematical model that ignores supplier constraints. If your EOQ is 250 units but your supplier's minimum order is 500, you order 500. EOQ tells you the direction to move — if you're ordering 2,000 when EOQ says 250, reducing order size will save money even if you can't reach exactly 250.
How do I estimate holding cost if I don't know it precisely?
Use 20–30% of your unit cost as an annual holding cost estimate. For a product costing $10, that's $2–3/unit/year. This covers the opportunity cost of capital, storage space, shrinkage, and obsolescence risk. Refine the number once you know your actual warehouse cost per square foot per SKU.
What is ordering cost for a Shopify merchant?
Ordering cost is the total cost to place and receive one purchase order: your time at an hourly rate, any supplier processing fees, freight costs per shipment, and quality inspection time. For a small Shopify merchant, this is often $20–$100 per PO. Larger businesses with procurement teams may have ordering costs of $200–$500+ per order.
Can EOQ apply to made-to-order or dropship products?
No. EOQ assumes you hold physical inventory. For dropship products (where you never hold stock) or fully made-to-order items (where you only produce what's ordered), EOQ is not applicable because there is no holding cost and no inventory replenishment decision.
How does EOQ change if I get a volume discount?
Volume discounts require an extended EOQ analysis that trades off the discount savings against the additional holding costs from ordering more. If the discount saves more than the extra holding cost, order the minimum quantity required for the discount. This is called the 'EOQ with quantity discounts' model.
How often should I recalculate EOQ?
Recalculate when annual demand changes significantly (15%+), when ordering cost changes (new freight contract, new PO process), or when holding cost changes (new warehouse, new financing rate). For most stable businesses, an annual EOQ review is sufficient.
Frequently Asked Questions
You've calculated your optimal order quantity.
EOQ only works if your inventory counts are reliable. Inventory Guard monitors every inventory change in Shopify and alerts you the moment something unexpected happens.
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