Economic Order Quantity for Importers: How Much to Order

Every purchase order answers one question: how many units? Small orders mean paying for inspections and customs entries again and again. Large orders tie up cash and warehouse space. Economic order quantity (EOQ) is the order size where those two costs add up to the lowest total. This article explains when EOQ applies and where its optimum comes from. It then works through an example for a manufacturer that imports a component from Asia, with container limits and long lead times included.

What EOQ calculates

EOQ balances two costs that move in opposite directions as order size changes.

• Ordering cost per year = (D ÷ Q) × S. Bigger orders mean fewer orders per year, so this cost falls as order size grows.
• Holding cost per year = (Q ÷ 2) × H. Bigger orders mean more inventory on the shelf, so this cost rises as order size grows.

The order size that minimizes the sum of the two is:

Average inventory is Q ÷ 2 because stock starts at Q when an order arrives and falls toward zero before the next one lands, assuming steady use. Safety stock sits on top of that and is covered in Step 4 below.

When a business needs it

EOQ fits items with steady, repeat demand and a real fixed cost each time you place an order. Purchased components and raw materials for ongoing production are the classic case. These signs suggest your order sizes deserve a second look:

• Order sizes come from habit, such as "three months of supply" or "always a full container."
• Some parts overflow the warehouse while others run out.
• Inventory dollars grow faster than sales.
• You pay for air freight or expedites to cover gaps.

Adjust the method in these cases:

• Seasonal or lumpy demand. Plan by period with a time-phased schedule (MRP) and set each order to the demand in its period.
• Short shelf life or frequent design changes. Cap each order at what you can use before the item spoils or goes obsolete.
• A known price or tariff increase. Buying ahead can pay off. Compare the purchase savings with the extra holding cost before you commit.
• Container capacity, supplier minimums, price breaks, or limited space. Use EOQ as the starting point and test the realistic options, as the example below shows.

The optimization point

At the EOQ, annual ordering cost equals annual holding cost. That crossing is where total cost reaches its minimum. The chart uses the inputs from the example below: 24,000 units a year, $1,200 per order, and $10 per unit per year to hold stock.

The bottom of the curve is flat

Total cost changes slowly near the optimum. You can compare any order size with the EOQ using this ratio:

Ordering 25 percent more than the EOQ raises ordering plus holding cost by about 2.5 percent. Ordering half or double the EOQ raises it by 25 percent. The flat bottom gives you room to round to a full pallet or a full container at little cost. Large misses in either direction cost real money.

Worked example: a manufacturer that imports a component

A manufacturer in Southern California buys a machined component from a supplier in Asia. Each order ships by ocean into the ports of Los Angeles and Long Beach and moves by truck to the plant.

These figures are illustrative. They are not current freight or tariff rates.

Step 1. Calculate the EOQ

That works out to 10 orders a year. Ordering cost is 10 × $1,200 = $12,000. Holding cost is (2,400 ÷ 2) × $10 = $12,000. The total is $24,000, and the two parts are equal, as they always are at the EOQ.

Step 2. Fit the order to the container

An order of 2,400 units fills 80 percent of a container, and you pay for the whole container. The $4,500 container charge is a cost per shipment, so freight belongs in the comparison. Compare total annual cost at the order sizes you can actually ship:

Holding cost uses the $40 landed value. Freight has its own column because it changes with order size.

The full container wins. It costs $8,400 a year less than the textbook EOQ and $10,200 a year less than ordering two containers at a time. Two containers per order cut ordering cost, but they double the inventory you carry, and freight per unit stays the same at full loads. The EOQ pointed the buyer to about one container, and the container size set the exact number.

Step 3. Check supplier price breaks

Suppose the supplier offers a discount on orders of 6,000 units. Moving from 3,000 to 6,000 units adds $10,200 a year in the table above, so the discount has to save more than that:

A discount smaller than that loses money. Duty is generally based on the price paid to the supplier, so a discount also lowers duty, which makes the break-even a little easier to reach.

Step 4. Set the reorder point for a long lead time

EOQ tells you how much to order. The reorder point tells you when. For an overseas supplier, lead time runs from purchase order to receipt at your dock and covers production, ocean transit, customs clearance, and drayage.

• Average demand (d): 2,000 units per month
• Demand variation (σd): standard deviation of 300 units per month
• Average lead time (LT): 2.5 months
• Lead time variation (σLT): standard deviation of 0.5 month, about 2 weeks
• Service level: no stockout in 95% of order cycles, so z = 1.65

Lead time swings drive most of the safety stock. Inside the square root, 1,000,000 of the 1,225,000 comes from lead time variation, about 82 percent. If steadier sailings and faster customs clearance cut lead time variation from two weeks to one, safety stock falls by about 690 units. That frees about $27,600 of inventory and saves about $6,900 a year in holding cost.

Reorder on inventory position. The reorder point of 6,830 is more than double the 3,000-unit order, so one or two orders are usually in transit at any time. Compare the reorder point with inventory position, which is stock on hand plus stock on order, minus backorders. On-hand stock in this example never reaches 6,830, so a rule based on the shelf count alone would place an order every time someone checks.

What moves the EOQ

EOQ moves with the square root of its inputs, so it changes less than the cost change that drives it.

• Higher landed cost lowers the EOQ. If tariffs raise landed cost by 20 percent, from $40 to $48, holding cost rises to $12 and EOQ falls about 9 percent, to about 2,190 units. In this example the full container still wins, at $63,600 a year against about $75,600 for the new EOQ.
• A lower cost per order lowers the EOQ. Cutting S from $1,200 to $600, through blanket purchase orders and combined customs entries, lowers EOQ about 29 percent, to about 1,700 units. Ordering plus holding cost drops from $24,000 to about $17,000. This is the Lean approach of making small orders cheap. For imported goods it pays off most when several items or suppliers share one container, so each item ships in smaller amounts while the container still ships full.

How to put EOQ to work

1. Start with your largest repeat items. Rank purchased items by annual spend and pick the ones with steady demand. Pull 12 months of usage for each.
2. Build the cost per order (S) from invoices. Add the costs that occur once per order, such as admin time, inspection, customs broker and filing fees, bank fees, and receiving. Leave per-unit and per-container charges out of S.
3. Build the holding cost (H). Multiply your carrying rate by landed cost. Carrying rates commonly fall between 20 and 30 percent of inventory value per year.
4. Calculate, then test real options. In a spreadsheet, EOQ is =SQRT(2*D*S/H). Then compare total annual cost, including freight, at the sizes you can actually buy: full containers, supplier minimums, and price breaks. Pick the lowest.
5. Set safety stock and the reorder point. Use your measured lead time variation, and trigger orders from inventory position.
6. Review each quarter. Recalculate whenever demand, freight rates, or tariffs change.

KPIs to track

• Inventory turns: annual cost of goods sold ÷ average inventory value
• Fill rate: share of demand filled from stock on hand
• Container utilization: units shipped ÷ container capacity
• Expedite spend: air freight and rush charges per month
• Cost per purchase order: keeps S current as fees change

Related: How the Producer Price Index Affects Your Input Costs