The optimal order quantity, also known as the EOQ or economic order quantity is an equation used for inventory that could be used for calculating the ideal or optimal order quantity that a business must buy for its inventory with regards to predetermined production costs, the rate of demand, as well as other factors. This primarily done to reduce the variable costs of inventory, and the particular formula considers various costs including holding, storage, shortage, and ordering. But how do you do this exactly?
Basic Economic Order Quantity Calculation
For you to figure out your EOQ, you could use the EOQ formula.
- Demand per annum, in units
- Fixed cost per annum – This is your ordering costs and is dependent on how much you have to spend on tasks for purchasing stock such as inspections, order fees, etc.
- Carrying cost per annum, per unit – This is how much you spend on maintaining your inventory, including utilities, storage, insurance, etc.
If your business is fully operational, you could browse your records to determine your cost and demand rates the previous year. On the other hand, if you have yet to launch your business, you could look at cost estimates from vendor quotes and research your top competitors.
Crucial Things to Keep in Mind and Consider
For your EOQ to work, you must use it as a permanent element of your inventory system reviews so that you could monitor your inventory regularly and order a fixed quantity every time your inventory reaches a certain reorder point and reduce the possibility of inventory shortage. Additionally, if your inventory is constantly on the move and if you’re having a difficult time monitoring it, consider getting help from a professional supply chain and logistics consulting provider. They’ll help you apply the EOQ formula to your actual inventory and help you with inventory management.