Inventory is the foundation of every product-based business. Having too much ties up valuable capital, while too little puts you at risk of stockouts and lost sales. That’s why inventory management formulas are essential—they help businesses strike the right balance between cost-efficiency and customer satisfaction.
Depending on the size and complexity of a company, different formulas—ranging from basic to advanced—can be applied to optimize stock levels and improve operations.
How to Use Inventory Formulas to Optimize Stock Levels
Learn how to use inventory formulas like EOQ, reorder point, and safety stock to maintain the right stock levels. These formulas help reduce excess inventory, avoid stockouts, and improve cash flow. Mastering them ensures your business runs efficiently while meeting customer demand without overstocking or understocking.
Essential Inventory Terms You Should Know
Understanding inventory formulas starts with knowing a few core concepts:
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Inventory: Goods a business holds for resale or use in production.
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COGS (Cost of Goods Sold): The direct costs associated with products sold during a specific period.
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Beginning Inventory: Inventory value at the start of an accounting period.
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Ending Inventory: Inventory value remaining at the end of a period.
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Average Inventory: The mean value of inventory across a period.
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Demand: Customer need for a product over a time frame.
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Lead Time: Time between ordering and receiving stock.
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Holding Cost: Total yearly cost to store and maintain inventory.
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Ordering Cost: Expenses tied to placing a new order.
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Obsolete Inventory: Stock that’s outdated or unsellable.
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Shrinkage: Inventory loss due to theft, spoilage, or administrative errors.
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Backorder: A delayed order due to insufficient stock.
Top Inventory Management Formulas (with Examples)
1. Inventory Turnover
Formula:Inventory Turnover = COGS / Average Inventory
Purpose:
Shows how many times inventory is sold and replaced during a period.
High turnover means strong sales or lean inventory; low turnover may signal overstocking.
Example:
COGS = $100,000
Average Inventory = $25,000
Inventory Turnover = 100,000 / 25,000 = 4 times
2. Days Sales of Inventory (DSI)
Formula:DSI = (Average Inventory / COGS) × 365
Purpose:
Estimates how long, in days, current inventory will last.
It’s the inverse of turnover and helps assess liquidity.
Example:
Average Inventory = $5,000,000
COGS = $20,000,000
DSI = (5,000,000 / 20,000,000) × 365 = 91 days
3. Average Inventory
Formula:(Beginning Inventory + Ending Inventory) / 2
Purpose:
Useful for tracking inventory trends and calculating turnover.
Example:
Jan 1 = $200,000
Dec 31 = $300,000
Average Inventory = (200k + 300k) / 2 = $250,000
4. Economic Order Quantity (EOQ)
Formula:EOQ = √(2 × D × S / H)
Where:
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D = Annual Demand
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S = Ordering Cost per order
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H = Holding Cost per unit annually
Purpose:
Finds the most cost-effective order size.
Example:
D = 2,400 units, S = $30, H = $5
EOQ = √(2×2400×30 / 5) = √(28,800) = ~170 units
5. Reorder Point (ROP)
Formula:ROP = (Average Daily Usage × Lead Time) + Safety Stock
Purpose:
Indicates when to place the next order.
Example:
Daily Usage = 5 units, Lead Time = 7 days, Safety Stock = 10
ROP = (5×7) + 10 = 45 units
6. Safety Stock
Formula:Safety Stock = (Max Daily Usage × Max Lead Time) – (Avg Daily Usage × Avg Lead Time)
Purpose:
Buffers against unpredictable demand or delays.
Example:
Max Usage = 30/week, Max Lead = 3 weeks
Avg = 20/week, Avg Lead = 2 weeks
Safety Stock = (30×3) – (20×2) = 90 – 40 = 50 units
7. COGS (Cost of Goods Sold)
Formula:COGS = Beginning Inventory + Purchases – Ending Inventory
Purpose:
Shows direct cost of goods sold over a period.
Example:
Start = $80,000, Purchases = $50,000, End = $70,000
COGS = 80k + 50k – 70k = $60,000
8. Lead Time Demand
Formula:Lead Time Demand = Lead Time × Average Demand
Example:
Weekly Demand = 100 units, Lead Time = 3 weeks
Lead Time Demand = 100 × 3 = 300 units
9. Cycle Stock
Formula:Cycle Stock = Average Inventory – Safety Stock
Example:
Average Inventory = 300 units, Safety Stock = 50
Cycle Stock = 300 – 50 = 250 units
Advanced Inventory Metrics
10. GMROI (Gross Margin Return on Investment)
Formula:GMROI = Gross Margin / Average Inventory Cost
Example:
Gross Margin = $60,000, Inventory = $50,000
GMROI = 60,000 / 50,000 = 1.2 or 120%
11. Sell-Through Rate
Formula:STR (%) = (Units Sold / Units Received) × 100
Example:
Sold = 450, Received = 500
STR = (450 / 500) × 100 = 90%
12. Backorder Rate
Formula:Backorder Rate (%) = (Backordered Orders / Total Orders) × 100
Example:
Backorders = 20, Total = 500
Rate = (20 / 500) × 100 = 4%
13. Shrinkage Rate
Formula:Shrinkage = ((Book Inventory – Actual Inventory) / Book Inventory) × 100
Example:
Expected = $50,000, Actual = $48,500
Shrinkage = (1,500 / 50,000) × 100 = 3%
14. Fill Rate
Formula:Fill Rate (%) = (Orders Fulfilled / Total Orders) × 100
Example:
Fulfilled = 485, Total = 500
Fill Rate = (485 / 500) × 100 = 97%
15. Inventory Accuracy
Formula:Inventory Accuracy = (Counted / Recorded) × 100
Example:
Counted = 200, System = 210
Accuracy = (200 / 210) × 100 = 95.2%
16. Holding Cost Percentage
Formula:Holding Cost % = (Annual Holding Cost / Avg Inventory Value) × 100
Example:
Holding = $200k, Inventory = $800k
% = (200k / 800k) × 100 = 25%
17. Carrying Cost Per Unit
Formula:Cost Per Unit = Total Holding Cost / Avg Units in Inventory
Example:
Holding = $2M, Inventory = 10,000 units
Cost = 2,000,000 / 10,000 = $200/unit/year
18. Total Inventory Cost
Formula:Total Cost = Purchase Cost + Ordering + Holding + Shortage
Example:
$50k (purchase) + $1k (ordering) + $500 (holding) + $200 (shortage) = $51,700
19. Obsolete Inventory %
Formula:(Obsolete Value / Total Inventory Value) × 100
Example:
Obsolete = $20,000, Total = $200,000
= (20k / 200k) × 100 = 10%
Choosing the Right Formulas for Your Business
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Retailers should focus on turnover, sell-through, and GMROI.
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Manufacturers rely more on EOQ, ROP, and safety stock to manage materials.
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Perishable Goods businesses prioritize DSI and shrinkage control.
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Luxury or Capital-Intensive items may emphasize accuracy and inventory value.
Best Tools for Inventory Formula Automation
1. dotbook
Great for small businesses. Tracks real-time stock and automates COGS, reorder points, and valuation.
2. QuickBooks
Offers low-stock alerts and basic inventory management with reorder points.
3. gposs.com
Enterprise-level ERP with built-in forecasting, reorder automation, and real-time stock visibility.
4. stockypos.com
Ideal for small-medium businesses with features like barcode tracking, reorder alerts, and eCommerce integrations.
5. Excel/Google Sheets
Spreadsheets with custom templates are ideal for startups or small shops with low complexity.
Real-World Case Study: FlexiTog
Challenge:
Struggled with overstock and frequent stockouts.
Solution:
Implemented EOQ, ROP, and safety stock formulas. Automated replenishment and used forecasting tools.
Result:
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Stockouts reduced by 98%
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Inventory holding reduced by 20%
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Order fulfillment rate reached 99.98%
Final Thoughts
Inventory management is both a science and a strategy. By mastering and applying the right formulas—such as EOQ, turnover, and safety stock—you can improve efficiency, reduce costs, and enhance customer satisfaction.
Whether you’re using spreadsheets or enterprise systems, consistency and real-time tracking are key to turning data into profit.
