Updated March 2026
Economic Order Quantity (EOQ): What It Means for Inventory Management
Economic order quantity (EOQ) is the ideal number of units to order each time you restock, balancing ordering costs against holding costs. Order too little and you pay more in shipping and processing. Order too much and you pay more in warehousing and tied-up cash.
The Formula
EOQ = √(2DS / H)
D is annual demand (units/year), S is the fixed cost per order (shipping, processing, admin), and H is the annual holding cost per unit (storage, insurance, depreciation). The formula finds the order size where total ordering + holding costs are minimized.
Example
You sell 3,600 units of a product per year. Each purchase order costs you $50 to process and ship. Holding one unit for a year costs $4 (storage, insurance, capital cost).
EOQ = √(2 × 3600 × 50 / 4) = √(360000 / 4) = √90000 = 300 units
Order 300 units each time.
At 300 units per order, you'll place 12 orders per year (3,600 ÷ 300). This minimizes your combined ordering and storage costs. Ordering 600 at a time would halve your ordering costs but double your average inventory and storage costs.
Why It Matters for Shopify Merchants
Most Shopify merchants either order too much (tying up cash) or too little (paying excess shipping and risking stockouts). EOQ gives you a data-driven answer. For brands scaling beyond their first year, the difference between an optimized order size and a gut-feel order size can be thousands of dollars annually in unnecessary storage or shipping costs. EOQ is most useful for products with stable demand and predictable costs — which covers most of the catalogue for established DTC brands.
How Alertr Helps
Alertr calculates total units needed per reorder based on your actual sell rate, lead time, and stock runway configuration. While it doesn't calculate EOQ directly, its reorder quantity recommendations factor in your current sell rate and desired coverage period — giving you a practical order size based on real data rather than theoretical minimums.
Related Terms
Frequently Asked Questions
When should I use EOQ?
EOQ works best for products with relatively stable demand and known, fixed ordering costs. It's less useful for seasonal products, new launches, or items where demand is unpredictable.
Does EOQ account for bulk discounts?
The basic formula doesn't. If your supplier offers price breaks at certain quantities, you may want to order more than the EOQ to capture the discount — but only if the savings exceed the extra holding costs.
What if my ordering costs are hard to calculate?
Estimate them. Include: shipping per order, payment processing, staff time to place and receive the order, and any customs fees. Even a rough estimate makes EOQ more useful than guessing.
Is EOQ still relevant for dropshipping?
Less so, since you don't hold inventory. EOQ is primarily for merchants who warehouse their own stock or use 3PL fulfillment where holding costs are real.
Skip the Manual Calculations
Alertr tracks sell rates and forecasts stock levels automatically from your Shopify data. Inventory forecasting and reorder alerts. Free tier available, no credit card required.
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