As 2025 unfolds, Australian businesses are navigating a complex web of supply chain disruptions, fluctuating demand, and cost pressures. Enter Economic Order Quantity (EOQ)—a classic, but newly relevant, formula for striking the perfect balance between holding too much and too little inventory. Let’s unpack how EOQ is making a comeback, the new twists in its application, and how you can leverage it for smarter stock management and stronger cash flow this year.
What is Economic Order Quantity (EOQ)?
EOQ is a time-tested inventory management model that helps businesses determine the ideal order quantity to minimise total inventory costs. These costs include:
- Ordering costs: Expenses related to placing and receiving orders (e.g., shipping, administration).
- Holding costs: Costs of storing unsold goods (e.g., warehousing, insurance, spoilage).
- Stockout costs: The cost of running out of stock, such as lost sales or emergency reordering.
The EOQ formula considers annual demand, the fixed cost of each order, and the per-unit holding cost. The goal: order the exact quantity that minimises total costs over the year.
EOQ in 2025: New Pressures, New Priorities
While EOQ has been around since the early 20th century, its relevance is surging in 2025 for a few key reasons:
- Supply chain volatility: Ongoing global disruptions and unpredictable shipping times mean overstocking is riskier—and so is understocking.
- Rising capital costs: With the RBA cash rate hovering at 4.35% and business lending rates above 7%, tying up cash in excess inventory is more expensive than ever.
- Data-driven operations: Cloud-based inventory management systems make it easier for SMEs to analyse real-time demand and costs, allowing for more accurate EOQ calculations.
For example, a Melbourne-based electronics distributor recently used EOQ modelling to cut its average inventory by 18%—freeing up over $400,000 in working capital. They balanced this with slightly more frequent, smaller orders to reduce the risk of obsolete stock as consumer trends shifted rapidly in the post-pandemic market.
How to Implement EOQ in Your Business
Ready to bring EOQ into your 2025 operations? Here’s a practical roadmap:
- Gather accurate data. You’ll need annual demand, ordering costs per purchase, and holding costs per unit per year. Inventory management software or your accounting platform can help.
- Calculate your EOQ. Use the classic formula: EOQ = √((2DS)/H), where D is annual demand, S is ordering cost per order, and H is holding cost per unit per year.
- Review and adjust regularly. In 2025’s fast-moving environment, revisit your EOQ each quarter—or whenever demand or supplier costs shift.
- Factor in supply chain risks. If your suppliers are experiencing delays, consider safety stock or flexible EOQ models to avoid costly stockouts.
Many businesses are also integrating EOQ with just-in-time (JIT) inventory or vendor-managed inventory (VMI) strategies for even greater efficiency. However, the best approach depends on your industry, product shelf life, and supplier reliability.
EOQ and Government Policy: What’s New in 2025?
The Australian government’s 2025 SME Resilience Package includes grants for digital inventory upgrades and supply chain risk assessments. This is opening doors for smaller businesses to deploy EOQ analytics once reserved for big corporates. At the same time, the ATO’s instant asset write-off threshold ($30,000 per asset) is incentivising investment in smarter warehousing and logistics tech—tools that make EOQ implementation more actionable and accurate.
Real-World Applications and Pitfalls
EOQ isn’t a set-and-forget tool. For example, a Sydney food wholesaler discovered that using EOQ without accounting for seasonal demand spikes led to costly understocking in the lead-up to Christmas. The lesson? Use EOQ as a starting point, but layer on demand forecasting and supplier lead-time analysis for best results.
- Don’t ignore perishability or obsolescence—EOQ works best for stable, non-perishable goods.
- Blend EOQ with safety stock for critical or high-variability items.
- Use government grants and incentives to upgrade your inventory analytics.
Conclusion
Economic Order Quantity is more than a dusty formula—it’s a powerful lever for cost control and cash flow optimisation in 2025. With the right data and technology, Australian businesses of all sizes can cut waste, boost efficiency, and weather supply chain storms. Ready to run the numbers and see what EOQ could do for your bottom line?
