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Economic order quantity (EOQ) is the order size that makes your total inventory cost as low as possible. It balances two costs that pull in opposite directions: the cost of placing orders and the cost of holding stock. Order too often and admin fees pile up. Order too much and cash sits on a shelf.
Every restock decision carries two bills. The first is ordering cost, which covers the admin of placing and receiving an order. Think of shipping fees, payment charges, and the staff time spent checking a delivery in.
The second is holding cost, which is what you pay to keep a unit on the shelf for a year. Warehouse rent, insurance, and tied-up cash all land here. The longer stock waits, the more it quietly costs you.
These two move in opposite directions. Big, infrequent orders cut your ordering bill but raise your holding bill. Small, frequent orders do the reverse.
Picture a seesaw with a cost on each end. EOQ is the point where the plank sits level and the total is lowest. It’s the bottom of a U-shaped cost curve.
The maths is older than most people expect. Ford W. Harris published the square-root formula in 1913, in an article called “How Many Parts to Make at Once”. It has barely changed since.
The formula is the square root of 2DS divided by H. D is your annual demand in units. S is the cost of placing one order, and H is the cost of holding one unit for a year.
You don’t need to love algebra to use it. A spreadsheet handles it in one cell. The hard part is getting honest numbers for S and H.
Most store owners underestimate both. Their calculated EOQ then comes out too large. Careful inventory management starts with measuring those two costs properly.
To find S, add up everything a single order costs regardless of size. Freight, bank charges, customs paperwork, and the hour someone spends checking the pallet all count. Divide that by the number of orders you placed last year.
Leave out anything that scales with quantity. Per-unit shipping and the stock itself belong elsewhere in your accounts. Mixing them in inflates S and pushes your EOQ too high.
Holding cost is where most calculations go wrong. Owners count the rent and stop there. However, four separate things belong in that number.
Storage is the obvious one, covering space, shelving, and utilities. Capital cost is next, because money spent on stock can’t be spent elsewhere. Across the wider market, inventory ties up about 8.00% of annual sales for the average firm.
Then comes risk, which is the stock you lose before selling it. Industry surveys put retail shrink at roughly 1.6% of sales, worth about $112.1 billion. That loss belongs in H, not in a separate mental bucket.
Obsolescence finishes the list. Stock that goes out of season or out of date still cost you money. A slow-moving pallet also blocks space a faster seller could use.
EOQ assumes demand is steady all year. Very few stores actually work that way. A gift shop selling four times as much in December will get a misleading answer.
It also assumes your costs stay fixed. Bulk discounts break that rule immediately, since a bigger order changes the unit price. Supplier minimums do the same thing.
A supplier minimum order quantity can sit above your calculated EOQ. Then the decision is made for you, and EOQ becomes a sanity check instead of an instruction.
Still, the formula earns its place as a starting point. Run it per product, then adjust for seasonality and supplier terms. Treat the output as a first draft, never a final rule.
Imagine a WooCommerce store called Copperleaf Kitchen selling cast iron pans. One pan sells steadily at 4,800 units a year. The team wants to know how many to order at a time.
They measure their ordering cost carefully first. Freight, customs paperwork, and receiving time come to about $45 per order. That figure holds whether the order is small or large.
Next they work out holding cost per pan per year. Storage, insurance, tied-up cash, and expected shrink total roughly $3. So D is 4,800, S is $45, and H is $3.
Running the formula gives about 379 pans per order. That works out to roughly 12.7 orders a year, or one every four weeks.
At 379 pans, the two costs land almost exactly level. Ordering costs about $570 for the year, and holding costs about $569. The combined bill is roughly $1,138.
Now compare that with the habit they had before. Copperleaf used to order 1,200 pans four times a year, which felt efficient. Ordering dropped to $180, but holding rose to $1,800.
That totals $1,980, so the old habit cost about $842 more every year. The saving came from one spreadsheet cell, not from renegotiating with anyone.
It helps to see that $842 as profit rather than as a cost cut. Average gross margin across the wider market runs near 37.76%. Copperleaf would need roughly $2,230 in extra sales to earn the same money.
Going too small hurts just as much. Ordering 100 pans at a time means 48 orders and $2,160 in ordering costs. By contrast, holding falls to only $150, and the total climbs to $2,310.
The lesson is that both extremes are expensive. Copperleaf also checks its inventory turnover afterwards to confirm the pans really are moving at the assumed rate. A practical guide to managing stock levels in WooCommerce helps them set the alerts.
These two get confused constantly, yet they answer different questions. You need both to run a restock system properly.
Your reorder point depends on lead time and demand while you wait. EOQ ignores timing entirely. For example, a slow supplier raises your reorder point without changing your EOQ at all.
Add up storage, insurance, shrink, and the cost of tied-up cash for a year. Then divide that total by the average number of units you store. Many owners express it as a percentage of unit cost instead.
Include your landed cost when valuing the stock, not just the invoice price. Otherwise you’ll understate the capital tied up.
Mostly not, and the reason is simple. Dropshipping means you never hold the stock yourself. With holding cost near zero, the formula loses its balancing act.
EOQ matters when you own inventory and pay to keep it. It fits stores buying wholesale far better than pure dropshipping models.
Start with the products that tie up the most money. A handful of steady, high-volume lines usually account for most of your inventory cost. Those are where the savings actually live.
Skip it for slow sellers and one-off lines. For those, safety stock thinking serves you better than an optimised order size.
Economic order quantity turns restocking from a guess into a calculation. It won’t survive contact with a seasonal spike or a supplier minimum, but it gives you a defensible starting number. For steady sellers, that one figure can quietly save a store hundreds a year.
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