Economic Order Quantity (EOQ) is: following the complete understanding
When reusing the product, many businesses order based on what they need at the right time rather than using the repeat order quantity formula. Instead, they must optimize the way they order and pay the product using the Economic Order Quantity (EOQ) formula.
The EOQ formula helps calculate the optimal number of orders to save money for eCommerce logistics and warehousing costs. By calculating EOQ, you can make better decisions about how many products will be ordered in a certain period of time.
To find out the Economic Order Quantity, you can read this article until it’s finished:
What is EConomic Order Quantity or EOQ
EOQ stands for Economic Order Quantity. This is a measurement used in operating, logistics, and supply management. In essence, EOQ is a tool used to determine the volume and frequency of orders needed to meet certain levels of request while minimizing costs per order.
Economic Order Quantity is a set point designed to help the company minimize inventory costs and storage costs.
Inventory ordering fees fell with an increase in ordering volume due to purchase on an economic scale. However, along with the increase in inventory measures, inventory storage costs increase. EOQ is the exact point that minimizes the two costs inversely.
Why do you have to calculate the Economic Order Quantity?
Counting EOQ for your business offers several benefits that affect your profits. This is a great way to find out how many products need to be purchased to maintain an efficient supply chain while reducing costs.
Here are the main benefits of EOQ calculations.
Minimize inventory costs
Saving additional inventory or inventory can quickly increase storage costs. Inventory costs can also rise depending on the way you order, the stock is damaged, and what products are never sold. If you constantly re-resell products that have low speed, EOQ can help determine the number of orders in a certain period of time.
EOQ can help you better understand how much you need to order again and how often. By calculating how much you need based on how much you sell in a certain period of time, you can avoid running out of stock without too much supply in hand for a long time.
You may be surprised that ordering in smaller quantities may be more cost effective for your business, or it can also be the opposite – Counting EOQ can help determine it.
Increase overall efficiency
Overall, calculating EOQ can help you make better decisions in terms of storing and managing inventory.
Today many businesses order supplies based on “hunch” about how much to order, instead of ordering how many products are actually needed.
Counting EOQ is a smart way to better measure how much you need is based on the important cost variable.
3 factors you need to pay attention to in calculating the Economic Order Quantity
EOQ formula consists of three variables: storage costs, requests, and order fees. We break every variable below.
1. Storage Cost (H)
Storage costs (also known as carrying costs) refer to the total inventory storage costs. Minimizing inventory costs is an important supply chain management strategy.
How much do you spend on storing and storing inventory, per unit, per year? To calculate EOQ correctly, you must first determine the cost of your storage. To do this, you can refer to the simple formula below:
2. Annual Request (D)
How many requests do you get for a product every year? By looking at historical order data, you can determine how many products you sell from year to year.
3. Booking fee (s)
Also referred to as ‘setup fees’, how much order per purchase? This is done with a base per order and includes shipping and handling fees.
Economic Order Quantity Formula
EOQ formula is:
EOQ = root squared from: [2SD] / h
- S = preparation costs (per order, generally including shipping and handling)
- D = Request level (number sold per year)
- H = Storage costs (per year, per unit)
Example case in calculating EOQ
If you have never used EOQ before, here is an example of how to calculate it:
Suppose you have the following variables:
- $ 0.75 in storage costs per unit = H.
- Request 10,000 per year = D
- An average order fee of $ 500 = s
You will get this formula: EOQ = square root of (2) (500) (10,000) /. 75) = 3,652 units per order.
Your optimal order quantity is 3,652 units for these specific products.
Other factors that can optimize supplies storage
Things such as seasonal trends or large sales can also affect the accuracy of your inventory. Besides EOQ, there are several other ways to optimize inventory.
1. REORDER POINTS.
Instead of checking inventory levels manually to re-order the product, you can set automatic re-order points that automatically place an order after your inventory level reaches a certain threshold.
To facilitate this, you can invest in inventory management software or accounting software that has asset management features and stocks such as Accurate Online.
2. Safety stock measurement
There are times when requests can increase suddenly or there are problems with suppliers who can prevent you from having sufficient inventory. Security stock is just an additional inventory outside the expected request.
Safety Stock is also often used when product demands or high services such as holidays or massive promotions or flash sale.
3. Tracking inventory in real time
Monitor your stock level easily and find out where the product is stored in your warehouse by tracking inventory in real-time.
That way, you know how many products can be sent now, make a faster inventory order decision, and communicate any delay from the items that have run out quickly.
By using EOQ for your business, you can improve your overall inventory management and stock process. By ordering the amount of stock of supplies right instead of guessing what will be ordered, you can reduce costs, prevent out of stock, and keep your supply chain operating smoothly.
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