What Is EOQ (Economic Order Quantity)?

Economic Order Quantity (EOQ) is the inventory planning formula that smart retailers rely on to reduce costs, optimize stock levels, and keep operations flowing smoothly. It helps you answer a vital question: how much stock should you order to minimize your total inventory costs?

By calculating EOQ, businesses can find the “just right” quantity that avoids both overordering (which increases holding costs) and underordering (which leads to stockouts and missed revenue). EOQ saves time and cash ; it also creates a stronger foundation for scalable, profitable inventory planning.

The EOQ Formula Explained

Here’s the standard EOQ formula:

EOQ = √(2DS ÷ H)

Where:

• D: Annual demand in units

• S: Ordering cost per purchase (e.g., admin, shipping, processing)

• H: Annual holding cost per unit (e.g., storage, insurance, depreciation)

Let’s break it down clearly:

• 2DS tells you the interaction between demand and cost to place an order.

• Dividing by H evaluates how those costs relate to storage costs.

• The square root gives you the optimal quantity to order at one time.

Example:

• Annual demand = 10,000 units

• Order cost = $50

• Holding cost per unit/year = $2

EOQ = √(2 × 10,000 × 50 ÷ 2) = √500,000 ≈ 707 units

So, your optimal order quantity is ~707 units. That’s your EOQ.

Why EOQ Matters

EOQ isn’t just a cost-cutting tool, it’s a decision-making framework.

• It helps prevent stockouts without overordering.

• It allows you to time purchases more effectively based on true demand.

• It provides visibility into how your cash is tied up in inventory.

• It serves as a starting point for smarter automation in your inventory workflows.

Whether you manage a lean Shopify storefront or operate across multiple warehouses, EOQ empowers you to scale with control.

How to Calculate EOQ: A Step-by-Step Example

Let’s walk through EOQ in action for clarity:

1. Find your annual demand (D):
   Your Shopify analytics or Tightly’s forecasting tool will show you how many units of a SKU you sold last year. Say it’s 10,000 units.

2. Estimate your ordering cost (S):
   This includes admin work, freight, customs, etc. Let’s use $50 per order.

3. Estimate your annual holding cost (H):
   Include rent, shrinkage, depreciation, and opportunity cost. Let’s use $2 per unit per year.

4. Plug into the formula:
   EOQ = √(2 × 10,000 × 50 ÷ 2) = √500,000 ≈ 707 units

Pro tip: If you round to 710 units, you’ll place 14 orders per year (10,000 ÷ 710). This balances your stock and capital perfectly, without unnecessary backorders or storage strain.

The Benefits of Using EOQ in Your Inventory Strategy

1. Minimizes Total Inventory Costs

EOQ helps you strike a cost-saving balance between two major forces:

• Ordering costs: The administrative, logistical, and shipping costs that come with every purchase order.

• Holding costs: The ongoing expenses of storing, insuring, and managing your inventory.

By pinpointing the most cost-effective order size, EOQ reduces the total number of orders placed each year while avoiding excessive stock accumulation that inflates warehousing and depreciation costs.

2. Frees Up Working Capital

Excess inventory ties up cash which could be better used elsewhere. This could be in marketing, hiring, product development, or new channels, for example. EOQ allows you to operate leaner, keeping just enough stock on hand to meet demand, while redirecting capital toward high-growth opportunities.

3. Supports More Predictable Purchasing Cycles

With EOQ in place, your purchasing activity becomes more intentional and consistent. You’ll know exactly how many units to order and how often, which will reduce the reactive “just-in-case” buying that often leads to stock inefficiencies.

4. Prevents Costly Stockouts and Overstocking

When used in tandem with reorder points and safety stock, EOQ acts as a buffer against underordering. It ensures that when inventory levels drop to a critical threshold, you’re not just alerted - it’s clear how much to order to avoid a sales disruption without overcommitting.

5. Improves Fulfillment Consistency and Customer Trust

When your EOQ strategy keeps products flowing at the right rate, your fulfillment performance improves - leading to faster deliveries, fewer cancellations, and a better customer experience. Over time, that consistency builds brand loyalty and repeat purchases.

6. Enables Smarter Automation and Forecasting

EOQ provides the foundational logic for many inventory automation tools. Platforms like Tightly can use EOQ to automate reorder triggers, set predictive purchasing schedules, and dynamically adjust inventory targets - saving hours of manual work while maintaining accuracy.

Where EOQ Falls Short and What to Watch For

While EOQ is a trusted classic in inventory management, it comes with built-in limitations. Knowing when and where EOQ may not be enough is essential to applying it effectively in real-world retail.

1. Assumes Constant, Predictable Demand

The EOQ formula relies on a steady annual demand rate. But in retail (especially ecommerce) demand fluctuates due to:

• Seasonality (e.g., holidays, back-to-school, summer drops)

• Promotions and influencer campaigns

• Market volatility and unexpected spikes (e.g., viral moments or economic downturns)

If your demand isn’t consistent, EOQ alone may under- or overestimate your needs.

2. Ignores Safety Stock

EOQ calculates the ideal order size, not when to place the order. It doesn’t account for demand surges or supplier delays, so without a safety stock buffer or a defined reorder point, EOQ can lead to stockouts during unexpected disruptions.

Tightly solves this by integrating EOQ with safety stock logic, so replenishment decisions are informed by both real-world uncertainty and baseline demand.

3. Doesn’t Account for Supplier Constraints

In practice, most suppliers don’t let you order any quantity you like. Common limitations include:

• Minimum Order Quantities (MOQs)

• Volume discounts (e.g., better pricing for buying in bulk)

EOQ may suggest ordering 707 units, but if your MOQ is 1,000 (or if 1,000 gets you a 20% discount) it might make sense to override the EOQ result. Modern platforms help navigate this trade-off.

4. Assumes Fixed Ordering and Holding Costs

EOQ works best when costs are stable. But in reality:

• Freight and fuel surcharges fluctuate.

• Warehouse space may become constrained during peak seasons.

• Product depreciation or spoilage may vary (especially in beauty, food, or tech).

Because EOQ doesn’t adapt to cost variability, it should be used as a guide - not a rigid rule.

5. Doesn’t Account for Stockout Costs

EOQ minimizes holding and ordering costs, but says nothing about the cost of missed sales, lost customers, or brand damage when you run out of stock. In competitive markets, stockouts cost more than just a transaction, they damage trust.

That’s why high-growth brands pair EOQ with customer-driven KPIs and buffer inventory strategies.

6. Operational Constraints Can Override “Optimal”

Even if EOQ recommends 1,500 units, you might only have shelf space for 800 - or budget for 1,000. Staffing limitations, shipment capacity, or packaging requirements may also impact how much you can order, regardless of the math.

In these cases, EOQ should inform the decision, but operational realities should drive the final choice.

Best Practices for Using EOQ in 2025

Don’t calculate EOQ once, instead review it quarterly. Your demand curve, supplier terms, and storage costs can shift.
Use separate EOQ values per product. Each SKU behaves differently, and your most valuable items may need tighter control.
Layer in safety stock and reorder points. This protects you from variability in lead time or sudden sales spikes.
Use EOQ to trigger, not dictate. Let EOQ shape your default order size, but factor in promos, bundling, and restock windows.
Leverage EOQ inside your inventory software. Manual spreadsheets introduce lag and errors. Modern platforms (like Tightly) let you adjust EOQ dynamically based on real-time data.

How Tightly Turns EOQ into Action

EOQ is even more powerful when paired with automation, forecasting, and supplier logic, which is exactly what Tightly delivers.

• Live EOQ Calculations per SKU: As demand, costs, and holding rates shift, Tightly recalculates EOQ automatically.

• EOQ and Reorder Point Integration: Tightly links EOQ to dynamic reorder points, so you know how much to order and when, based on forecasted demand and real-time stock.

• Built-In Safety Stock Protection: Account for uncertainty and demand spikes with smart buffer logic that works alongside EOQ.

• Supplier MOQs and Bulk Pricing Awareness: Tightly flags when larger orders are more cost-effective, even if they exceed the EOQ.

• PO Automation When EOQ Is Hit: Automatically generate and send purchase orders when EOQ and reorder thresholds align.

With Tightly, EOQ isn’t a static spreadsheet calculation. It’s part of a living system that keeps your inventory lean, your customers satisfied, and your capital flowing.

Conclusion

EOQ is a simple formula, but its impact is anything but basic. When used correctly, it becomes the foundation for smarter purchasing, reduced waste, and more agile inventory control. And when combined with a platform like Tightly, it transforms into a dynamic, real-time decision engine.

Your action plan starts now

• Identify your top 10 SKUs and calculate their EOQ.

• Compare actual order sizes to EOQ recommendations.

• Layer EOQ logic into your reorder point strategy.

• Monitor EOQ against supplier MOQs and bulk discounts.

• Automate reorder triggers inside your inventory software.

  
  

Remember: Excess inventory is expensive and causes a lost opportunity. And missed sales due to stockouts? Even more costly.

Take action today

• Audit your current ordering patterns against EOQ.

• Add safety stock calculations to your top-selling SKUs.

• Evaluate your supplier terms for cost-saving opportunities.

• Explore EOQ automation with Tightly’s forecasting tools.

Get started with Tightly today