EOQ; What is it? Why is it important?
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EOQ; What is it? Why is it important?
When you’re an eCommerce seller, returns can occur for a number of different reasons, but ultimately they are sometimes just simply inevitable. But, returns don’t mean you’ve lost a customer, its how you handle the returns process that can determine if they’re going to come back or not
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What is EOQ?
Economic Order Quantity (EOQ) is an inventory management tool designed to ensure you have just the right amount of stock in your warehouse, without needing to worry about having to pay extra due to under or overstocking
The EOQ formula is a mathematical tool that is designed to give you accuracy when it comes to calculating how much inventory you need at any given time.
Sound complicated? Lets look at an example of EOQ in practice…
EOQ in Practice; An Example Of How It Works…
Imagine that you own a car dealership, and you want to make sure that you always have the right amount of cars. If you order too many cars, you risk running out of space, and if they don’t sell quickly, your dealership becomes overcrowded for X amount of time which can lead to increased costs.
Alternatively, you may underestimate how many cars you need to order, only to then realise that you now don’t have enough in the dealership. This means you’re going to have to purchase more, and pay for transport yet again.
How do you avoid this? By using the EOQ formula to accurately calculate the exact amount of cars needed at the time.
EOQ calculations aim to create a balance between two things; how much it costs to store the cars (holding costs) and how much it costs to purchase new cars (ordering costs)
It ensures you always have the right amount of stock, and helps you avoid overspending.
Beautifully crafted leather products.
The Importance Of EOQ As An Inventory Management Tool…
Good inventory management is essential for your eCommerce business as poor inventory management can have a negative impact on your business’s profitability since you need to find a good balance between inventory levels and your product demand.
When you order too much stock and it doesn’t sell fast enough, you end up paying more for your storage since your inventory will now require more space in the warehouse, for a potentially longer time if it is slow moving stock. Not only this, but overstocking means you end up paying for more on shipping too.
Similarly, not having enough stock in the warehouse means you could miss out on potential customers due to not having the desired product in stock. Again, your shipping costs are likely to increase especially if you pay a rush fee to have the stock sent to you quicker.
Why Use EOQ? What Are The Benefits?
There are many reasons behind, and benefits to using EOQ to help improve and manage your inventory, so let’s discuss them now…
Beautifully crafted leather products.
The Benefits; Reduce Average Cost of Inventory…
As expected, the more inventory you have in the warehouse, the higher your storage costs will be since more space will be required to store your products. As previously mentioned, your storage costs will also increase if the products are slow-moving since they will take up space for longer in the warehouse, ultimately leading to higher storage costs overall. Therefore, using the EOQ formula to calculate how much stock you need, and when you need, helps to ensure that your overall costs are low.
The Benefits; Prevent Stock-outs, Improved Inventory Control…
Using the EOQ formula helps to ensure that you are avoiding things such as stock-outs, which occurs when you completely run out of a particular product in your warehouse. Not only do you risk losing customers, but you can also lose out on money. Calculating EOQ can help avoid this while ensuring your business maintains profitability, and most importantly, a higher level of customer retention.
Beautifully crafted leather products.
The Benefits; Make Better, More Informed Decisions…
When running an eCommerce business, there are many things you need to take into consideration as you want to ensure that you are making the best possible decision for you, your business, and your customers. Using an EOQ calculator will help to ensure that you have the ability to make informed, profitable decisions about your inventory levels.
The Benefits; Provides Cost Effective Solutions Overall, Improved Cash Flow…
By optimizing inventory levels, companies can free up cash that would otherwise be tied up in excess inventory. This allows them to invest the freed-up capital in other productive activities and fuel business growth.
Beautifully crafted leather products.
The Limitations of Using EOQ; What Are The Cons?
Much like anything, there are always going to be some cons. Now that we have discussed the benefits of using EOQ to improve and control your inventory management strategy, lets discuss what some of the cons are when using the EOQ model as a business strategy…
Our Fulfilment Shipping Prices Start From Only £2.91
What is EOQ?
Economic Order Quantity (EOQ) is an inventory management tool designed to ensure you have just the right amount of stock in your warehouse, without needing to worry about having to pay extra due to under or overstocking
The EOQ formula is a mathematical tool that is designed to give you accuracy when it comes to calculating how much inventory you need at any given time.
Sound complicated? Lets look at an example of EOQ in practice…
Imagine that you own a car dealership, and you want to make sure that you always have the right amount of cars. If you order too many cars, you risk running out of space, and if they don’t sell quickly, your dealership becomes overcrowded for X amount of time which can lead to increased costs.
Alternatively, you may underestimate how many cars you need to order, only to then realise that you now don’t have enough in the dealership. This means you’re going to have to purchase more, and pay for transport yet again.
How do you avoid this? By using the EOQ formula to accurately calculate the exact amount of cars needed at the time.
EOQ calculations aim to create a balance between two things; how much it costs to store the cars (holding costs) and how much it costs to purchase new cars (ordering costs)
It ensures you always have the right amount of stock, and helps you avoid overspending.
Our Fulfilment Shipping Prices Start From Only £2.91
EOQ In Practice; An Example of The EOQ Method…
Imagine that you own a car dealership, and you want to make sure that you always have the right amount of cars. If you order too many cars, you risk running out of space, and if they don’t sell quickly, your dealership becomes overcrowded for X amount of time which can lead to increased costs.
Alternatively, you may underestimate how many cars you need to order, only to then realise that you now don’t have enough in the dealership. This means you’re going to have to purchase more, and pay for transport yet again.
How do you avoid this? By using the EOQ formula to accurately calculate the exact amount of cars needed at the time.
EOQ calculations aim to create a balance between two things; how much it costs to store the cars (holding costs) and how much it costs to purchase new cars (ordering costs)
It ensures you always have the right amount of stock, and helps you avoid overspending.
Our Fulfilment Shipping Prices Start From Only £2.91
The Importance of EOQ As An Inventory Management Tool…
Good inventory management is essential for your eCommerce business as poor inventory management can have a negative impact on your business’s profitability since you need to find a good balance between inventory levels and your product demand.
When you order too much stock and it doesn’t sell fast enough, you end up paying more for your storage since your inventory will now require more space in the warehouse, for a potentially longer time if it is slow moving stock. Not only this, but overstocking means you end up paying for more on shipping too.
Similarly, not having enough stock in the warehouse means you could miss out on potential customers due to not having the desired product in stock. Again, your shipping costs are likely to increase especially if you pay a rush fee to have the stock sent to you quicker.
Stable Demand
The EOQ formula doesn’t take into account that product demand can change throughout the year, therefore affecting your inventory levels.
For example, you may find that one product sells particularly well during eCommerce seasonal peaks (such as Christmas) but the product tends to be slow moving the rest of the year. This could cause complications with the EOQ calculation, and more specifically its accuracy, since EOQ is calculated using previous data.
Therefore, fluctuating demand may lead to inaccuracies with your EOQ calculations, so it is important to take this into consideration when using the formula to manage your inventory.
Costs
EOQ is calculated using fixed data, and as mentioned, does not take fluctuation into consideration.
With that being said, EOQ assumes that costs remain the same consistently. It fails to take into consideration that costs change (usually increasing) due to things such as inflation, changes in supplier, or fluctuating interest rates.
Again, without this being taken into consideration, you may find that your end calculation is inaccurate.
Discounts
When calculating EOQ, it is crucial to use accurate data for the formula to work effectively. One common mistake businesses make is adding discounts to purchase or selling prices when inputting data. Discounts can change the amount ordered and distort the accurate costs of a product item.
Adding discounts to buying prices can obscure which price is used, and this will all contribute towards producing inaccurate EOQ calculations. Adding discounts to selling prices can disrupt the demand curve which in turn leads to incorrect EOQ amounts. Subsequently, placing orders for the incorrect quantity of stock due to inaccurate EOQ calculations can cause cash flow problems.
Businesses should not include discounts when calculating EOQ to avoid making costly errors in inventory management. Accurate data input can help ensure that orders are correct and avoid the need to restock regularly, which can tie up valuable cash flow resources.
Using the EOQ formula helps to ensure that you are avoiding things such as stock-outs, which occurs when you completely run out of a particular product in your warehouse. Not only do you risk losing customers, but you can also lose out on money. Calculating EOQ can help avoid this while ensuring your business maintains profitability, and most importantly, a higher level of customer retention.
As expected, the more inventory you have in the warehouse, the higher your storage costs will be since more space will be required to store your products. As previously mentioned, your storage costs will also increase if the products are slow-moving since they will take up space for longer in the warehouse, ultimately leading to higher storage costs overall. Therefore, using the EOQ formula to calculate how much stock you need, and when you need, helps to ensure that your overall costs are low.
The Benefits; Make Better More Informed Decisions About Your Business
When running an eCommerce business, there are many things you need to take into consideration as you want to ensure that you are making the best possible decision for you, your business, and your customers. Using an EOQ calculator will help to ensure that you have the ability to make informed, profitable decisions about your inventory levels.
Understanding and Determining Demand…
When using the EOQ formula to calculate your required inventory levels, it is of course crucial that you consider what your product demand is like as this is representative of the amount of products you expect to sell in a year. This then helps you accurately calculate how much stock you need to order.
Beautifully crafted leather products.
Our Fulfilment Shipping Prices Start From Only £2.91
The Limitations of Using EOQ; Exploring The Cons…
Much like anything, there are always going to be some cons. Now that we have discussed the benefits of using EOQ to improve and control your inventory management strategy, lets discuss what some of the cons are when using the EOQ model as a business strategy…
Our Fulfilment Shipping Prices Start From Only £2.91
Stable Demand
The EOQ formula doesn’t take into account that product demand can change throughout the year, therefore affecting your inventory levels.
For example, you may find that one product sells particularly well during eCommerce seasonal peaks (such as Christmas) but the product tends to be slow moving the rest of the year. This could cause complications with the EOQ calculation, and more specifically its accuracy, since EOQ is calculated using previous data.
Therefore, fluctuating demand may lead to inaccuracies with your EOQ calculations, so it is important to take this into consideration when using the formula to manage your inventory.
Our Fulfilment Shipping Prices Start From Only £2.91
Costs
EOQ is calculated using fixed data, and as mentioned, does not take fluctuation into consideration.
With that being said, EOQ assumes that costs remain the same consistently. It fails to take into consideration that costs change (usually increasing) due to things such as inflation, changes in supplier, or fluctuating interest rates.
Again, without this being taken into consideration, you may find that your end calculation is inaccurate.
Our Fulfilment Shipping Prices Start From Only £2.91
Discounts
When calculating EOQ, it is crucial to use accurate data for the formula to work effectively. One common mistake businesses make is adding discounts to purchase or selling prices when inputting data. Discounts can change the amount ordered and distort the accurate costs of a product item.
Adding discounts to buying prices can obscure which price is used, and this will all contribute towards producing inaccurate EOQ calculations. Adding discounts to selling prices can disrupt the demand curve which in turn leads to incorrect EOQ amounts. Subsequently, placing orders for the incorrect quantity of stock due to inaccurate EOQ calculations can cause cash flow problems.
Businesses should not include discounts when calculating EOQ to avoid making costly errors in inventory management. Accurate data input can help ensure that orders are correct and avoid the need to restock regularly, which can tie up valuable cash flow resources.
Our Fulfilment Shipping Prices Start From Only £2.91
Understanding and Determining Demand…
When using the EOQ formula to calculate your required inventory levels, it is of course crucial that you consider what your product demand is like as this is representative of the amount of products you expect to sell in a year. This then helps you accurately calculate how much stock you need to order.
Our Fulfilment Shipping Prices Start From Only £2.91
Holding Costs
Sometimes referred to as ‘carrying cost’, the holding cost refers to the expenses that are associated with holding your inventory. Holding costs is an umbrella term as these costs can also cover; storage, labour, fulfilment, insurance, inventory, and depreciation costs.
Our Fulfilment Shipping Prices Start From Only £2.91
The EOQ Formula; How To Use It
Now that we have discussed the 3 components used to calculate EOQ, we will go over the actual formula that is used for calculation
Order Cost = O
Demand = D
Holding Cost = H
Therefore, the formula is as follows;
EOQ = √(2OD) / Holding Cost)
Our Fulfilment Shipping Prices Start From Only £2.91
The EOQ Formula in Practice; An Example…
Let’s consider an example where a car dealership wants to calculate the EOQ for ordering a specific car model:
Annual Demand: 500 units
Ordering Cost: £20,000 per order (the cost of transporting and setting up a truckload of cars from the manufacturer)
Holding Cost: £10 per unit per year
Using the EOQ formula:
EOQ = √((2 * 500 * £20,000) / £10)
EOQ = √((10,000,000) / £10)
EOQ ≈ √1,000,000
EOQ ≈ 1,000
Therefore, the calculated EOQ for ordering this car model is approximately 1,000 units.
Our Fulfilment Shipping Prices Start From Only £2.91
Optimizing Inventory Levels Using EOQ
Let’s look at some real-life examples of companies that use EOQs.
Amazon, the global e-commerce giant, leverages EOQ to streamline their inventory management processes. By analysing customer purchasing patterns, Amazon determines the optimal order quantities for various products, reducing holding costs and avoiding stockouts. This allows them to provide efficient order fulfilment and deliver products to customers in a timely manner
Toyota, one of the largest car manufacturers, utilizes EOQ to manage its inventory effectively. By employing the EOQ model, Toyota optimizes its ordering quantities, reducing both holding and ordering costs. This approach allows them to maintain efficient inventory levels while meeting customer demands
Our Fulfilment Shipping Prices Start From Only £2.91
Implementing EOQ in Supply Chain Management
Supply chain management involves the coordination of various activities, including inventory management. The Economic Order Quantity (EOQ) model plays a critical role in improving and managing inventory levels in the supply chain, ensuring efficient operations and customer satisfaction.
Holding Costs…
Sometimes referred to as ‘carrying cost’, the holding cost refers to the expenses that are associated with holding your inventory. Holding costs is an umbrella term as these costs can also cover; storage, labour, fulfilment, insurance, inventory, and depreciation costs.
Order Cost…
This refers to the typical cost associated with making an order. Ordering costs will typically cover the fees associated with shipping and handling when you place an order for inventory.
Beautifully crafted leather products.
The EOQ Formula; How To Use It..
Now that we have discussed the 3 components used to calculate EOQ, we will go over the actual formula that is used for calculation
Order Cost = O
Demand = D
Holding Cost = H
Therefore, the formula is as follows;
EOQ = √(2OD) / Holding Cost)
The EOQ Formula in Practice…
Beautifully crafted leather products.
Let’s consider an example where a car dealership wants to calculate the EOQ for ordering a specific car model:
Annual Demand: 500 units
Ordering Cost: £20,000 per order (the cost of transporting and setting up a truckload of cars from the manufacturer)
Holding Cost: £10 per unit per year
Using the EOQ formula:
EOQ = √((2 * 500 * £20,000) / £10)
EOQ = √((10,000,000) / £10)
EOQ ≈ √1,000,000
EOQ ≈ 1,000
Therefore, the calculated EOQ for ordering this car model is approximately 1,000 units.
Optimizing Inventory Levels Using EOQ…
Let’s look at some real-life examples of companies who use EOQs.
Amazon, the global e-commerce giant, leverages EOQ to streamline their inventory management processes. By analysing customer purchasing patterns, Amazon determines the optimal order quantities for various products, reducing holding costs and avoiding stockouts. This allows them to provide efficient order fulfilment and deliver products to customers in a timely manner
Toyota, one of the largest car manufacturers, utilizes EOQ to manage its inventory effectively. By employing the EOQ model, Toyota optimizes its ordering quantities, reducing both holding and ordering costs. This approach allows them to maintain efficient inventory levels while meeting customer demands
Implementing EOQ in Supply Chain Management…
Supply chain management involves the coordination of various activities, including inventory management. The Economic Order Quantity (EOQ) model plays a critical role in improving and managing inventory levels in the supply chain, ensuring efficient operations and customer satisfaction.
Beautifully crafted leather products.
Demand Forecasting
EOQ requires accurate demand forecasting to determine the optimal order quantity. By analysing historical data and market trends, businesses can estimate customer demand and plan their inventory levels accordingly. This enables efficient coordination between suppliers, manufacturers, and distributors.
Warehousing and Storage
Our warehouses provide secure and well-organized storage facilities for your inventory. With our expertise in warehouse management, we can optimize space utilization, ensure proper inventory rotation, and maintain accurate stock tracking. This ensures streamlined inventory operations and inventory accuracy
Inventory Management
EOQ helps strike the right balance between holding costs and ordering costs. By minimizing holding costs through optimal order quantities, businesses can reduce inventory carrying costs and free up working capital. This allows for improved cash flow and capital utilization throughout the supply chain
Our Fulfilment Shipping Prices Start From Only £2.91
Optimizing EOQ; How TSP Can Help…
Supply chain management involves the coordination of various activities, including inventory management. The Economic Order Quantity (EOQ) model plays a critical role in improving and managing inventory levels in the supply chain, ensuring efficient operations and customer satisfaction.
Expert Inventory Management
Our experienced team can utilize advanced analytics and historical data analysis to determine the optimal order quantity based on EOQ principles. By considering variables such as holding costs, ordering costs, and demand patterns, we can identify the most cost-effective order quantities that minimize inventory costs
Supplier Management
EOQ helps supplier management by helping businesses establish optimal order quantities and frequencies. By sharing EOQ data with suppliers, businesses can negotiate volume discounts and establish delivery schedules that align with their inventory replenishment needs. This collaboration ensures a smooth supply chain flow and reduces lead time.
Streamlined Order Fulfilment
We can seamlessly integrate with your systems to gain real-time inventory visibility. This enables us to efficiently manage order fulfilment processes. By having accurate visibility and up-to-date inventory information, we can minimize stock-outs and backorders while ensuring timely and accurate order fulfilment
Improved Transport
As your chosen 3PL, we can handle the transportation and distribution of your inventory. Leveraging our network of transportation resources and strategically located fulfilment centres, we can optimise the order delivery process, reducing lead times and improving customer satisfaction
Advanced Technology
We provide cutting-edge inventory management software and systems that seamlessly integrate with your e-commerce platform. Our technology enables real-time inventory tracking, demand forecasting, automatic reorder point calculations, and comprehensive reporting. This allows you to make informed decisions and optimize your inventory levels based on EOQ principles.
Demand Forecasting
EOQ requires accurate demand forecasting to determine the optimal order quantity. By analysing historical data and market trends, businesses can estimate customer demand and plan their inventory levels accordingly. This enables efficient coordination between suppliers, manufacturers, and distributors.
Supplier Management
EOQ helps supplier management by helping businesses establish optimal order quantities and frequencies. By sharing EOQ data with suppliers, businesses can negotiate volume discounts and establish delivery schedules that align with their inventory replenishment needs. This collaboration ensures a smooth supply chain flow and reduces lead time.
Inventory Management
EOQ helps strike the right balance between holding costs and ordering costs. By minimizing holding costs through optimal order quantities, businesses can reduce inventory carrying costs and free up working capital. This allows for improved cash flow and capital utilization throughout the supply chain
Using A 3PL To Optimise EOQ; How TSP Can Help…
Partnering with us as your 3PL (third-party logistics) provider can offer valuable support in optimising your EOQ (Economic Order Quantity) and enhancing your inventory management. Here are several ways we can assist you:
Expert Inventory Planning
Our experienced team can utilize advanced analytics and historical data analysis to determine the optimal order quantity based on EOQ principles. By considering variables such as holding costs, ordering costs, and demand patterns, we can identify the most cost-effective order quantities that minimize inventory costs
Warehousing and Storage
Our warehouses provide secure and well-organized storage facilities for your inventory. With our expertise in warehouse management, we can optimize space utilization, ensure proper inventory rotation, and maintain accurate stock tracking. This ensures streamlined inventory operations and inventory accuracy
Streamlined Order Fulfilment
We can seamlessly integrate with your systems to gain real-time inventory visibility. This enables us to efficiently manage order fulfilment processes. By having accurate visibility and up-to-date inventory information, we can minimize stock-outs and backorders while ensuring timely and accurate order fulfilment
Reduction in damaged items
Finding the right packaging can be a time-consuming and costly process, especially if you don’t have the same buying power or supplier relationships as a 3PL like TSP.
At our company, we understand the significance of using the appropriate packaging to ensure the safe shipment of your products.
We work closely with our clients to identify the most suitable packaging options tailored to their specific needs. Our expertise in packaging solutions allows us to provide you with cost-effective rates.
Our collaborative approach ensures a seamless shipping experience, enhances customer satisfaction, and optimizes your business operations.
Using TSP; Effective Transportation and Distribution…
As your chosen 3PL, we can handle the transportation and distribution of your inventory. Leveraging our network of transportation resources and strategically located fulfilment centres, we can optimise the order delivery process, reducing lead times and improving customer satisfaction.
Beautifully crafted leather products.
Using TSP; Advanced Technology…
We provide cutting-edge inventory management software and systems that seamlessly integrate with your ecommerce platform. Our technology enables real-time inventory tracking, demand forecasting, automatic reorder point calculations, and comprehensive reporting. This allows you to make informed decisions and optimize your inventory levels based on EOQ principles.
By partnering with us, you can benefit from our expertise in supply chain management, warehouse operations, order fulfilment, and technology integration. Together, we can drive your inventory management processes, minimize costs, and improve overall operational efficiency.
