5 Common Mistakes When Using the EOQ Formula

Getting EOQ Right

The Economic Order Quantity (EOQ) formula is a powerful tool, but it's only as good as the data you feed into it. Many businesses make critical errors in their calculations that lead to suboptimal ordering strategies. Here are 5 common mistakes to avoid.

1. Using Inaccurate Holding Costs

As discussed in other articles, holding costs are more than just warehouse rent. Failing to include the opportunity cost of capital, insurance, shrinkage, and obsolescence will artificially lower your holding cost (H). This results in an EOQ that is too high, leading to overstocking.

2. Ignoring Variable Ordering Costs

The ordering cost (S) in the EOQ formula should only include fixed costs associated with placing an order (e.g., the administrative cost of processing the PO, fixed delivery fees). If you include variable costs (like the per-unit cost of the item), your EOQ will be skewed.

3. Assuming Demand is Perfectly Constant

The classic EOQ model assumes that demand is constant throughout the year. If your business is highly seasonal, using an annual average demand will result in stockouts during peak season and excess inventory during the off-season. For seasonal goods, calculate EOQ for specific periods rather than the whole year.

4. Forgetting About Lead Time

EOQ tells you how much to order, but it doesn't tell you when to order. If you don't factor in supplier lead time, you will run out of stock before your EOQ order arrives. You must calculate your Reorder Point (ROP) in conjunction with your EOQ.

5. Blindly Trusting the Output

EOQ is a mathematical model, not a crystal ball. It doesn't account for supplier minimum order quantities (MOQs), impending price increases, or sudden market shifts. Always review the EOQ output and apply human judgment before finalizing your purchasing strategy.