What is EOQ Model?

by Carter Toni

It is very important to manage the inventory efficiently when running a business either online or physically. Because it is the stock or inventory of your company that will help you rise or fall in the market. Expedient employees should be hired to carry out the major and important tasks that could affect your whole supply chain also. In addition to this, you need to be aware of the quality as well as the volume of your products stored in the warehouses of your company. By this, you will be able to maintain the reorder points and monitor which product is needed to be stocked for the future needs of the customers.

However, utilizing inventory management software for efficient working, inventory calculation, as well as the management of your inventory, could help you a lot in this regard. Based on the automated grounds, these software or automated tools will guide you in every possible aspect relevant to your inventory. In addition to this, you will never miss any threat or risk coming in your way as the inventory management software when used, generates alerts in uncertain situations. This gives you a good amount of time to get ready and cope with the problems effectively.

What is the EOQ Model?

It is no secret that you need to make the amount of your inventory calculated by an expert with a good technique so you could avoid any stockouts in the future. The EOQ (Economic Order Quantity) is a Model that is used to calculate an optimal amount of order that is required to purchase for your future demands of the business. Moreover, this model is very handy if you are managing a small business, using EOQ as the inventory management software would help you a lot because it provides specific values regarding how much stock should behold and how much is to be ordered. By this, the needs of the customers are fulfilled from time to time as well as the inventory calculation becomes easy and simple.

When you order a minimum amount of a particular product, it is a very chaotic situation when the number of orders starts increasing. On the other hand, when you order a large amount of storage, your storage or holding cost increases simultaneously which also creates an uncertain situation in your business. So what to do? Here EOQ comes into play! Using this model to calculate the optimal number of orders needed could save you from any kind of difficulty in the future.

The formula of EOQ:

When using the EOQ (Economic Order Quantity) model to calculate the inventory of your business, it will help and guide you well to a great extent regarding what amount of order should be placed. Which will in turn enable you to minimize the cost of your business, holding costs of the inventory, and maintenance costs when there is excess stock leftover in the inventory of your business.

The formula of EOQ through which you can calculate the correct and optimal amount of orders that should be placed is stated as under;

EOQ = √2 ✕ S ✕ D / H


S= Set up costs (per order)

D= Demand rate (quantity sold per year)

H= Holding Costs (per unit)

Benefits of using EOQ in the Inventory Management:

Following are the primary important benefits of using the EOQ model for the correct order calculation of your inventory;

  • Reduce the stockouts risk of your inventory:

It is no secret that every businessman wishes that he has the stock or inventory present all the time for serving their customers. Likewise, when you use the EOQ model to calculate inventory and orders to be made of your business, it brings out a picture of the exact stock that should be ordered. In this way, you can avoid the risk of being out of stock when fulfilling the orders.

  • Decrease in the inventory costs of your business:

In this era of inflation, everyone is working hard to survive and fulfill his needs. Similarly, businesses are also affected because the cost of inventory is even higher than the optimal scale which puts the businessman in a situation of great dilemma. Therefore, using the EOQ model for the inventory calculation helps you a lot to estimate the right amount of orders that are needed to place. This in turn prevents you from spending unnecessary costs on the inventory.

  • Contributes well to the efficiency of your business:

Using the EOQ model as the inventory management tool of your business could help you in every aspect of your business. It fastens the shipping process and orders are also accepted timely because the volume of orders of inventory is presented clearly. Which in turn are delivered timely to the customers.

However, using inventory management software like Inventooly could also guide you well in terms of managing your inventory and order-related operations.

  • Decrease your holding costs of the inventory:

Holding and storing a large amount of inventory may seem good and fortunate for some businesses but it also needs care and constant investment in terms of holding costs as well as maintenance and repair costs. Therefore, by using the EOQ model, you can calculate the actual amount of inventory that will be economically suitable for your business to order and will not create the problem of spending too many costs on them.

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