How to Calculate Economic Order Quantity (EOQ) for Smarter Inventory Planning

Stockouts and overstocking cost Australian businesses thousands of dollars each year, often because of inefficient inventory planning. That’s where the Economic Order Quantity (EOQ) model comes in– especially valuable for freight shipping. This proven inventory management method helps businesses determine the ideal order size to reduce costs and improve operational efficiency.

Effective inventory management is crucial for Australian businesses that depend on reliable logistics and timely deliveries. EOQ plays a key role in maintaining the right stock levels, reducing freight expenses, and improving cash flow.

In this article, you'll learn what EOQ is, why it matters, how to calculate it using a simple formula, and how to apply it to real-world business scenarios to make smarter inventory decisions.

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What Is Economic Order Quantity?

Economic Order Quantity (EOQ) is a simple inventory formula that helps businesses calculate the ideal number of units to order to minimise total inventory costs. These include both ordering costs and holding costs.

EOQ helps prevent overordering and reduces the need for frequent restocks. It ensures a practical balance between stock availability and cost control.

For logistics and inventory managers, EOQ supports smarter inventory planning, reduces freight costs, and prevents supply chain waste. It also leads to better cash flow and more predictable reordering.

Want to know how to calculate EOQ? Keep reading for a simple formula, real-world example, and practical tips to apply EOQ to your freight and inventory strategy.

Why EOQ Matters in Freight and Logistics

In Australia, logistics costs are influenced by vast distances between cities, fluctuating fuel prices, and the high cost of last-mile delivery, especially in remote or regional areas. For small and medium-sized businesses distributing goods across the country, freight expenses can escalate quickly.

Many suppliers enforce minimum order quantities (MOQs), forcing businesses to buy in bulk — even when it doesn’t suit their actual needs or cash flow. This often leads to excess stock sitting idle in warehouses, tying up capital and increasing storage costs.

Economic order quantity helps businesses manage these challenges by identifying the most cost-efficient order size. It balances freight and storage costs with actual sales demand, allowing companies to plan smarter, reduce waste, and maintain lean inventory levels.

A well-calculated EOQ reduces the risk of:

• Over-ordering stock that expires or becomes dead stock
• Paying premium freight rates for urgent restocks
• Running out of stock due to poor planning

With EOQ, logistics managers can time deliveries more effectively, consolidate shipments, and reduce the number of unnecessary freight runs. This is especially valuable in Australia’s freight environment, where long distances and limited carrier options can quickly inflate logistics budgets.

EOQ Formula Explained in Simple Terms

The EOQ formula may look complex, but it’s easy to apply with a quick breakdown.

EOQ = √(2DS / H)

Where:

• D = Annual demand (units sold per year)
• S = Ordering cost per order (freight, admin, labour, etc.)
• H = Holding cost per unit per year (warehousing, insurance, depreciation)

Here’s how to understand each part:

• Demand (D): Estimate how many units you sell in a year using historical sales data or seasonal forecasts.
• Ordering Cost (S): This includes all costs involved in placing an order (freight, admin time, paperwork, and staff effort).
• Holding Cost (H): These are the costs to store each unit for a year, such as rent, insurance, spoilage, or depreciation.

Even rough estimates are more useful than guessing or relying on supplier minimums. You can always refine your inputs over time as better data becomes available.

Using the EOQ formula gives you a data-backed starting point for smarter ordering, helping you avoid excess stock, improve cash flow, and reduce unnecessary freight costs.

EOQ Formula With a Simple Calculation

Let’s look at a simple example using an Australian online retailer that sells fitness products nationwide.

In this case:

• Annual demand (D) is 10,000 units
• Ordering cost per order (S) is $100 (including admin and freight expenses)
• Holding cost per unit per year (H) is $2 (covering warehousing and storage costs)

Now let’s apply the EOQ formula:

EOQ = √(2 × D × S ÷ H)
EOQ = √(2 × 10,000 × 100 ÷ 2)
EOQ = √(1,000,000)
EOQ = 1,000 units

This suggests placing orders of 1,000 units to minimise costs. Based on annual demand, this would result in 10 orders per year.

Keep in mind: EOQ uses your internal cost data and doesn’t account for external supplier requirements like MOQs. If your supplier requires a different MOQ than your calculated EOQ, you may need to adjust your purchasing strategy, whether by negotiating terms, bundling products, or revisiting supplier agreements.

EOQ isn’t a rigid rule, but it’s valuable for aligning inventory levels with freight efficiency and cash flow goals.

EOQ vs Minimum Order Quantity: What’s the Difference?

Economic order quantity is a calculation that helps businesses determine the most cost-effective order size based on internal costs such as storage, freight, and ordering expenses.

MOQ, by contrast, is set by the supplier — and may not match what’s best for your business. It’s the smallest quantity they’re willing to sell in one order, and it doesn’t always align with what’s ideal for your business.

For instance, if your EOQ is 800 units but the supplier’s MOQ is 1,000, you’ll need to purchase more than necessary. Conversely, if your EOQ is 1,200 and the MOQ is 500, you have more flexibility.

When EOQ and MOQ conflict, businesses often negotiate with suppliers, consolidate product lines to reach minimums, or revisit contract terms during renewal periods.

How EOQ Helps Lower Freight Costs

Freight is often one of the biggest logistics costs for Australian businesses, especially when shipping across long distances or to remote areas. With courier rates varying widely by region and limited carrier options, poor planning can result in inflated costs.

When businesses rely on guesswork or react to stock shortages, they tend to place frequent, smaller orders. These attract higher per-unit freight rates and may require expensive, last-minute shipping.

EOQ makes it easier to consolidate shipments and reduce the frequency of freight runs — which helps cut costs. For example, switching from 52 weekly orders to 12 monthly bulk shipments could significantly cut freight costs and admin overhead.

Planning ahead also gives you time to compare carriers, negotiate better rates, and avoid urgent deliveries. Over time, this leads to more predictable logistics costs and smoother supply chain operations.

Final Tips for Smarter Inventory Planning

To get the most value from economic order quantity, combine strategic planning with practical tools and regular reviews. Here are some actionable tips for Australian businesses:

1. Use an EOQ Calculator

Use a free EOQ calculator to quickly find your ideal order size based on sales, freight costs, and storage fees.

2. Review Your EOQ Quarterly

Recalculate your EOQ each quarter to reflect fluctuations in customer demand, cost structures, or supplier terms.

3. Adjust for Freight Cost Changes

Reflect fuel price fluctuations and changes in carrier availability in your ordering cost inputs to keep your EOQ accurate.

4. Consider Shelf Life and Lead Times

Factor in product shelf life and supplier delivery timelines to avoid overstocking perishable or slow-moving items.

5. Use Technology to Streamline Freight Planning

Platforms like Couriers & Freight make it easier to align your EOQ strategy with real-world shipping. You can compare courier quotes, manage shipments, and track deliveries in one place.

Save More with Smarter Inventory and Freight Planning

EOQ is a practical, data-driven approach to smarter inventory and freight management. It helps you avoid overordering, reduce freight costs, and keep your cash flow in check.

Need help with your ordering and shipping? Couriers & Freight can make your logistics easier and help you save across your supply chain.

Optimise Your Orders. Cut Freight Costs.

Use EOQ to improve inventory planning and let Couriers & Freight help streamline your shipping for better savings.

Get a Quote Now