As online shopping continues to rise in the Philippines, businesses are under pressure to maintain the proper inventory levels. Order too much, and your storage costs rise; order too little, and you risk stockouts, disappointing customers, and lost sales. Finding the balance can be tricky, but that’s where the Economic Order Quantity (EOQ) formula comes in.
EOQ helps businesses determine the optimal amount of inventory to order, ensuring they meet demand while minimizing costs. It’s a simple yet powerful tool that helps reduce ordering and holding costs, so you don’t waste money and your customers don’t have to wait. Businesses that master inventory management can improve their profitability and increase customer satisfaction.
In this guide, we’ll break down what EOQ is, how the formula works, and how you can apply it to manage your operations in 2025 and beyond.
What is the EOQ Formula?
In inventory management, having the right amount of stock on hand is crucial. Ordering too much ties up capital and takes up valuable space, while ordering too little can lead to stockouts and lost sales. The Economic Order Quantity (EOQ) helps businesses strike that balance, ensuring they order the right amount at the right time.
EOQ is a practical tool for reducing ordering costs (costs to place and receive orders) and holding costs (costs of storing inventory). It helps businesses avoid the waste of excess stock and the risk of running out of popular items, making inventory management more efficient and cost-effective.
The EOQ Formula
To calculate EOQ, businesses use this formula:
Where:
- D = Annual demand (the number of units you need per year)
- S = Ordering cost (the cost associated with placing an order, including shipping, handling, and administrative costs)
- H = Holding cost (the cost of storing one unit of inventory for a year, including warehousing, insurance, and depreciation)
The EOQ formula allows businesses to:
- Reduce Costs: By optimizing the number of orders, businesses can minimize both ordering and storage costs.
- Improve Efficiency: With a clear understanding of the correct order quantity, companies can better manage inventory and prevent stockouts or overstocking.
- Maximize Profit: Efficient inventory management leads to better cash flow, lower storage fees, and fewer lost sales due to stockouts.
To fully understand how EOQ drives efficiency, let’s explore the core purposes and benefits of using this formula in your business operations.
Purpose of the EOQ Formula
The EOQ formula isn’t just a theoretical concept. It’s a practical tool that helps businesses reduce costs and optimise their inventory flow. By calculating the optimal order quantity, businesses can avoid common pitfalls such as over-ordering or running out of stock.
In the Philippines, e-commerce is growing at an impressive rate. In 2021, the market reached $17 billion, driven by 73 million active online users, and it’s expected to increase by 17%, reaching $24 billion by 2025. As demand increases, businesses are under pressure to manage inventory efficiently to meet customer expectations.
This is where EOQ becomes vital by ensuring inventory levels are optimized, businesses can meet growing demand without overstocking or understocking, both of which can negatively impact profitability and customer satisfaction.
Here’s why and how the EOQ formula drives operational success:
- Connection between EOQ and Operational Efficiency: EOQ directly impacts a company’s ability to run smoothly. By ordering the right amount of stock at the right time, businesses can reduce storage costs and avoid the chaos of last-minute orders or emergency stock replenishments. This makes the supply chain more predictable and allows for more focused decision-making.
- Relevance of EOQ for Local Retailers and Online Businesses in the Philippines: For businesses in the Philippines, whether you’re running a local store or an e-commerce platform, EOQ helps customize inventory needs to the local demand patterns. With an understanding of EOQ, local retailers can avoid overstocking, which is particularly important for products with fluctuating demand in the Philippine market.
By focusing on the correct order quantities, businesses can significantly improve their operational efficiency and enhance their competitiveness, even in a bustling e-commerce environment like the Philippines. To put the EOQ formula into practice, let’s break down the steps and guide you through the calculation process.
How to Calculate EOQ: A Step-by-Step Guide
Calculating EOQ is key to optimising inventory costs and ensuring your business doesn’t overbuy or understock. By following a few simple steps, you can pinpoint the most cost-effective order quantity that fits your needs.
This process is practical, clear, and critical for improving your purchasing decisions and supply chain efficiency.
Let’s break down the steps involved in calculating EOQ for your business:
Step 1: Gather the Required Information
To use the EOQ formula effectively, you need three key pieces of information:
- Annual Demand (D): This is the total quantity of units you expect to sell in a year.
- Ordering Cost (S): This is the fixed cost per order, which includes shipping, handling, and administrative expenses.
- Holding Cost (H): This is the cost of holding one unit of inventory for one year. It could include storage fees, insurance, and the depreciation of the goods.
Step 2: Apply the EOQ Formula
Once you have the values for D, S, and H, you can plug them into the EOQ formula:
EOQ = √(2DS/H)
Let’s break this down:
- 2DS: This part calculates the combined cost of ordering and the demand for the product.
- H: This represents the cost to hold one unit of inventory for a year.
Step 3: Perform the Calculation
Now, let’s see an example of EOQ calculation for better understanding:
Example Calculation:
Let’s say your business has the following data:
Using the formula: EOQ = √(2 x 10,000 x 50 / 2) EOQ = √(1,000,000 / 2) EOQ = √500,000 EOQ ≈ 707 units
So, the optimal order quantity for your business is 707 units. This is the ideal number of units you should order at a time to minimize your total inventory costs.
Step 4: Interpret the Results
The result of 707 units means that to minimize both ordering and holding costs, you should place an order of 707 units each time. This helps ensure that you are neither overstocking nor running out of stock, keeping your costs balanced and inventory at optimal levels.
Why This Is Important:
By calculating and implementing EOQ in your inventory management strategy, you can:
- Save on Storage Costs: Avoid overstocking and tying up capital in unnecessary inventory.
- Reduce Order Costs: Place fewer, larger orders to minimize expenses associated with ordering.
- Optimize Cash Flow: With better inventory management, you can free up cash that can be invested elsewhere in your business.
Understanding EOQ is just the start. To put it into practice and fine-tune your business operations, consider partnering with industry experts to help manage your inventory. Inspire Solutions Asia’s innovative logistics solutions can enhance your operational efficiency and drive better results for your business. Contact us now!
Factors Affecting EOQ: What You Need to Know
EOQ isn’t calculated in isolation. Real-world variables shape it, some constants, some that shift depending on where and how you operate. Factors like supplier lead times, fluctuating demand, and warehousing constraints in the Philippines often reshape the “ideal” order.
Let’s look at the breakdown of the key elements directly influencing how EOQ works:
1. Demand Fluctuations
Demand for products in the Philippines can vary due to seasonal trends, holidays, and local events. Here’s how these fluctuations impact businesses:
- Seasonal Demand & Consumer Behavior: In the Philippines, consumer behavior peaks during the Christmas season, as shopping and gift-buying rise. This is a crucial time for businesses to adjust their economic order quantity (EOQ). Similarly, during the Chinese New Year, products related to gifts and festive goods also see a rise in demand.
- Promotional campaigns and local events: Major sales events, such as “11.11” (Singles’ Day) and “12.12” (Double 12 Sale), also impact demand. Many local businesses adjust their economic order quantity (EOQ) to meet the surge in customer purchases during these sales.
Example: Lazada Philippines, a leading e-commerce platform, reports that it experiences significant traffic spikes on 11.11 (Singles’ Day) and 12.12 (Christmas sale). By adjusting their inventory strategies to meet increased demand, they avoid stockouts and ensure timely deliveries.
2. Impact of Setup and Holding Costs
Setup costs and holding costs play a significant role in calculating the Economic Order Quantity (EOQ). These costs fluctuate based on logistics, storage, and the handling of inventory.
- Setup Costs: Rising fuel prices and logistical costs in the Philippines can increase setup costs for businesses. For example, international shipping tariffs and import fees affect businesses importing goods from abroad, resulting in higher ordering costs.
- Holding Costs: The cost of warehousing in Metro Manila is relatively high, leading businesses to optimize their inventory to reduce storage expenses. SMEs in the Philippines, especially in areas like Quezon City, face increased storage fees due to limited warehouse space.
Example: SM Supermalls, a major player in retail, adjusted its inventory management practices when warehouse costs in Metro Manila spiked. By optimizing their Economic Order Quantity (EOQ) and reducing inventory holding times, they managed to keep costs under control.
Also Read: What Is a Central Warehouse and Its Role in Logistics
3. Role of Lead Time and Price Discounts
Lead time and price discounts impact the timing of orders and inventory levels:
- Lead Time: Local suppliers may have varying lead times depending on transportation availability and regional infrastructure. Longer lead times mean businesses must adjust their Economic Order Quantity (EOQ) to prevent stockouts.
- Price Discounts: Suppliers often offer bulk discounts, which can encourage businesses to order more. However, purchasing larger quantities can increase holding costs if demand does not match the increased inventory.
Example: Metro Retail Stores, one of the largest retail chains in the Philippines, works with local and international suppliers to take advantage of bulk discounts. However, due to unpredictable lead times during holiday seasons, they adjust their EOQ to ensure that products don’t sit idle in warehouses, which adds unnecessary holding costs.
4. Adjusting EOQ Based on Local Insights
Local businesses in the Philippines constantly adapt their EOQ calculations based on market conditions and consumer behavior.
- Holiday & Festival Adjustments: For instance, during the Holy Week and Christmas holidays, demand for specific products like groceries, gifts, and home items surges. These periods require local businesses to increase their inventory volume to meet the rising demand.
- Urban vs. Rural Market Variations: Businesses in urban areas, such as Metro Manila, may experience higher demand for tech gadgets, apparel, and online shopping, while rural businesses might see a surge in demand for agricultural tools and goods during planting and harvest seasons.
Example: 7-Eleven Philippines adjusts its inventory levels based on demand patterns in different locations. For example, during festivals and barangay fiestas, demand for specific products like beverages and snacks increases, prompting the company to adjust its Economic Order Quantity (EOQ) and increase stock levels in affected areas.
By considering these factors, companies can better understand the key elements that influence EOQ calculations, ensuring they remain competitive and responsive to customer demand.
While EOQ offers a solid framework for managing inventory costs, it’s not without limits. The model relies on a few key assumptions; in practice, those don’t always align with how businesses operate. That’s why it’s essential to understand where EOQ works best, and where it might fall short, before applying it across your strategy.
Key Assumptions and Limitations of EOQ
To fully understand how the EOQ formula applies in real-world scenarios, it’s important to examine the assumptions and limitations that may affect its effectiveness.
Below, we’ve highlighted key assumptions and limitations to help Filipino businesses understand the nuances of applying EOQ in dynamic markets.
| Assumptions | Limitations |
| Constant Demand: EOQ assumes demand remains constant over the year, which simplifies calculations but may not be realistic for all industries. | Fluctuating Demand: Real-world demand can be seasonal or subject to unpredictable market trends (e.g., holidays, promotions), especially in the Philippines where consumer behavior can vary significantly throughout the year. |
| Constant Ordering & Holding Costs: The formula assumes both ordering and holding costs are stable, which allows for easier calculations. | Cost Fluctuations: Both ordering and holding costs can change due to supplier pricing, transportation changes, or rising storage fees. In markets like the Philippines, where external costs like fuel or shipping can fluctuate, this assumption might not always be accurate. |
| No Bulk Discounts: EOQ does not account for the impact of bulk purchase discounts, which might encourage businesses to adjust their order size to take advantage of savings. | Missed Discounts: Many businesses benefit from volume-based discounts, but EOQ doesn’t incorporate this dynamic, potentially leading to missed cost-saving opportunities in sourcing products. |
| Uniform Lead Time: EOQ assumes that lead time (the time between ordering and receiving stock) is constant, simplifying the process of inventory replenishment. | Lead Time Variability: Lead times can be unpredictable, especially in regions like the Philippines, where logistics and supply chain delays may occur due to weather, infrastructure limitations, or international shipping disruptions. |
| Ideal for Non-Perishable Goods: EOQ works best for products that do not have expiration dates or other time-sensitive constraints. | Inapplicable to Perishable Goods: For businesses dealing with perishable goods, EOQ may not be suitable, as it doesn’t account for inventory turnover rates or expiration concerns. |
Understanding these assumptions and limitations helps Filipino businesses adapt EOQ to fit their unique needs. Businesses should adjust the EOQ formula as necessary based on factors like seasonal demand, supply chain variability, or cost changes to better align with market realities.
Now that we’ve explored the foundations of EOQ and its practical applications, let’s look at how to optimize inventory management by aligning EOQ with reorder points and integrating it with modern digital tools.
Also Read: How to Track Inventory: Steps and Tips
Optimizing Inventory Management with EOQ
To make the most of the Economic Order Quantity formula, businesses must effectively align it with reorder points, integrate it into their existing systems, and utilize automation. Let’s explore each of these elements in detail:
1. Aligning EOQ with Reorder Points
Reorder points help businesses know when to place new orders to prevent stockouts. When combined with the EOQ formula, reorder points ensure that businesses place orders just in time, avoiding both overstocking and stockouts.
How to use EOQ with reorder points:
- Calculate the reorder point based on the Economic Order Quantity (EOQ) and lead time.
- When stock reaches the reorder point, an order is placed automatically, maintaining optimal inventory levels.
2. EOQ & POS Systems
Point of Sale (POS) systems play a crucial role in calculating the Economic Order Quantity (EOQ). These systems provide real-time updates on inventory levels and sales data, making it easier to track stock, identify trends, and reorder products at the right time.
How POS systems help:
- Integrating EOQ with POS systems ensures that inventory levels are updated in real-time, reducing errors and improving decision-making.
- When a product reaches the reorder point, the POS system can automatically generate a purchase order based on the Economic Order Quantity (EOQ) calculation.
3. Role of Automation in EOQ Optimization
Automation simplifies the EOQ process by tracking inventory, placing orders, and updating stock levels without manual intervention.
How automation helps:
- Automated systems can track stock levels in real-time and automatically place orders when the reorder point is reached, saving businesses time and reducing human errors.
- Automation can also help manage other aspects of inventory management, such as forecasting demand, adjusting stock levels based on trends, and generating reports.
Filipino businesses can benefit from Inspire Solutions Asia’s automated inventory management system. By integrating EOQ with this software, businesses can ensure that their inventory is always optimized, reducing the risk of stockouts and excess stock.
The system provides real-time data, helping businesses make better decisions and manage their operations. These strategies ensure that businesses can meet demand without overstocking or facing stockouts, all while minimizing manual work and errors.
Maximizing Efficiency in Your eCommerce Operations
As businesses scale in the Philippines, optimizing fulfillment and inventory management becomes critical to meeting customer demands. Inspire Solutions Asia offers an integrated suite of services that help you manage your operations, improve delivery speeds, and reduce logistical overhead.
Their services, ranging from sourcing and importation to warehousing and fulfillment, Last-Mile Delivery, and Fusion SaaS, provide a one-stop solution for businesses looking to optimize their supply chains.
Key Benefits of Working with Inspire Solutions Asia:
- Optimized Warehousing: Secure and organized storage with live inventory tracking and value-added services like kitting and bundling.
- Efficient Fulfillment & Delivery: With Same Day and Next-Day Delivery services and a 99.8% pick accuracy, Inspire ensures timely deliveries that boost customer satisfaction.
- Advanced Technology Integration: With Fusion, an integrated SaaS platform, you can smooth operations and gain real-time insights into your business performance.
Get a Quote Today and Discover How Inspire Solutions Asia Can Help Optimize Your eCommerce Fulfillment. Take the next step in optimizing your operations. Contact us now for a customized solution to manage your business processes.
Conclusion
The Economic Order Quantity (EOQ) formula is a powerful tool that helps manage your inventory process, balancing ordering and holding costs to achieve operational efficiency. By aligning EOQ with real-time data, automated systems, and smart inventory management practices, you can ensure your business is equipped to meet growing demand without unnecessary overheads or risks.
At Inspire Solutions Asia, we understand the unique challenges faced by Filipino eCommerce businesses. Our comprehensive suite of services, from sourcing and importation to warehousing, fulfillment, and same-day delivery, ensures that your business operates smoothly, allowing you to focus on growth and customer engagement. Schedule a meeting with us today to discuss how our customized solutions can help you optimize inventory management, smooth operations, and enhance customer satisfaction. Let’s work together to make your business in the competitive eCommerce landscape.
