Why EOQ works against you in logistics
Are you cutting costs on purchases, yet still not seeing any increase in profits? Are you reducing stock levels to the bare minimum, yet your expenses keep rising anyway? Optimisation on paper and the reality of running a business are two different things. One person has filled the warehouse to the brim – now half the stock is just sitting there as dead weight. Another orders in small batches, only to find the shelves empty during the peak season. A third has negotiated a discount and is delighted, until they realise that the supplier has started taking longer to deliver and is charging triple the price for urgent orders.
The experts at Sargona Private Capital Greece analyse where your money is being lost and how to plan your purchasing so that your profit curve goes up.
The experts at Sargona Private Capital Greece analyse where your money is being lost and how to plan your purchasing so that your profit curve goes up.
EOQ (Economic Order Quantity) is a formula that determines the optimal quantity of stock to order in a single batch. The main idea is that small deliveries lead to frequent orders and unnecessary costs for transport and handling. Large deliveries lead to an overfilled warehouse and capital tied up in stock. The formula seeks a balance between these costs. It takes three factors into account: demand for the goods, the cost of placing the order, and storage costs.
The problem is that the model only works in stable, ‘greenhouse’ conditions, whereas real business is volatile. A separate issue is the cost of storage. It is difficult to calculate precisely because it includes warehouse rent, staff wages, product spoilage and other expenses. Companies often use approximate figures, which makes the formula’s calculations inaccurate, according to experts at Sargona Private Capital. Due to such errors, storage costs can rise by 15–25%, and instead of saving money, the company will face financial problems.
If a company starts using the EOQ formula, order volumes can fluctuate significantly from one day to the next: a small order today, a large one tomorrow, then a small one again. This might not be a problem for you, but it is inconvenient for the supplier. With constant fluctuations in demand, they have to reorganise production, maintain spare capacity and frequently adjust their plans. As a result, the supplier passes on their risks to you by raising the price. Formally, you are optimising your purchasing, but in reality you end up paying more due to the instability.
What is EOQ and why is it trusted?
Why EOQ causes problems for suppliers
Many companies believe that implementing EOQ will reduce their stock levels. But often, the reserve simply sits with the supplier, creating the illusion of savings, noted Sargona Private Capital managers. And if the supplier also decides to reduce its inventory, you'll experience shortages and sales will decline.
Errors in inventory management cost businesses worldwide an average of $1.7 trillion a year. Moreover, over $300 billion is linked to coordination issues between suppliers and customers.
One of the regulatory methods used by suppliers is the creation of additional stock, a so-called buffer. In other words, the supplier holds excess stock simply because they cannot predict demand. But stock incurs costs: warehousing, staff, and tied-up capital. And these costs are ultimately passed on in the price. This can manifest in various ways: price increases, reduced discounts, or lower delivery priority.
Errors in inventory management cost businesses worldwide an average of $1.7 trillion a year. Moreover, over $300 billion is linked to coordination issues between suppliers and customers.
One of the regulatory methods used by suppliers is the creation of additional stock, a so-called buffer. In other words, the supplier holds excess stock simply because they cannot predict demand. But stock incurs costs: warehousing, staff, and tied-up capital. And these costs are ultimately passed on in the price. This can manifest in various ways: price increases, reduced discounts, or lower delivery priority.
How suppliers pass on their costs
Sargona’s experts emphasise that EOQ is useful under stable conditions but performs poorly in unpredictable situations. Crucially, it creates the illusion of savings. On paper, everything looks better than it does in reality. If you look only at the figures, over time EOQ starts to increase losses rather than savings. In other words, it is not feasible to operate under this system in the long term.
Conclusion
Your wishes are our priority
© 2023 - 2025 All rights protected
