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7 Benefits Of Economic Order Quantity For Small Ecommerce Businesses

Any business that deals with stock knows that ordering can be tricky. Too much stock can be a burden.

If it can’t be shifted quickly, it’ll sit around, slowly eating into your budget by increasing storage costs. Order too little, and you might sell out, leaving customers disappointed. That’s where economic order quantity comes into play.

With economic order quantity or EOQ, you can avoid these problems, order enough stock to fulfill your needs, and keep inventory costs down. But what does this term mean, and how does it help improve your inventory planning? Let’s find out!

What is economic order quantity?

The economic order quantity (sometimes referred to as the optimal order quantity) is a company's ideal amount of stock order. Enough to fulfill the needs of customers while avoiding the overuse of storage. Once your economic order quantity has been calculated, it can be used to improve your inventory planning and inform your inventory reorder point. With the correct calculation, you can minimize both ordering and carrying costs. 

You need to know several factors to calculate the quantity of your economic order. These include 

  • The order cost: The total costs of ordering products (packaging, shipping, etc.). 
  • Holding cost: The total cost of storing a product. 
  • Demand rate: The cumulative amount of products sold each year. 

Once you properly understand these factors, you can calculate the quantity of your economic order. To calculate the EOQ, you need to calculate the following:

 Let’s give an example to put this into context. Picture a clothes retailer that sells 2,000 shirts each year. This costs $3 per year to hold each shirt in storage. The cost of placing an order is $2. So, we need to find the square root of the following sum 

(2(20002))3

This equals $2,666, and the square root of this number—the EOQ—is 51.6. 

Hint: If you’re still feeling stumped, this handy YouTube video helps with calculating EOQ. 

Benefits of EOQ for small ecommerce businesses

You should now understand how economic order quality applies to you. But why precisely should you calculate EOQ? Here are some of the top advantages.  

Reduces ordering and holding costs

When ordering any product, you must be confident that an item will sell out. Otherwise, you'll burn a hole in your pocket and get little reward in return. EOQ helps you order the perfect amount each time. Additionally, careful planning allows you to take advantage of bulk order discounts. 

Equally, more stock is needed for business. You have to pay to cover factors such as storage, insurance, and security. By ordering the optimum amount of stock, you can control storage more efficiently and manage some of the associated costs. 

Improves cash flow management

Cash flow management involves monitoring the money coming into your organization compared to the money going out. Effective cash flow management means you always have a complete picture of company finances. In other words, there’s a reduced risk that your outgoings will overtake the money coming into your business. 

EOQ means you always know how much you need to spend on stock, so it’s less likely that you’ll spend too much. If EOQ is used alongside cloud software for cash flow management, you gain even greater control over outgoings as the software provides access to features such as cash flow forecasts, providing complete cash visibility.

Lowers stockouts and overstock

The last thing you want is to disappoint customers. Suppose you have a popular product, and customers spend time in-store or online. When they reach the checkout, they’re told that an item is out of stock. This is a surefire way to leave a sour taste in customers' mouths and result in shortage costs. Unfortunately, it's a common scenario for businesses that are too frugal with ordering. 

Conversely, the opposite scenario can be equally troublesome. You must manage and pay for storage when you have too much stock. What’s more, space is taken up that could be used for more popular products. 

EOQ helps to avoid either scenario, matching stock ordering to customer demand. This enhances both supplier and customer relationships.

Enhances supplier relationships and order accuracy

Suppliers like repeat customers. The more you order, the more you strengthen your relationship with a supplier. But it isn’t just the regularity of your order that a supplier will thank you for. Sudden, large-quantity orders can put a lot of pressure on a supplier. 

They have to scramble to fulfill your order correctly, which means they’re more likely to make an error. You might have to return your order or request additional items. 

Regularly ordering a fixed amount of stock gives a supplier plenty of forewarning. There’s more chance they’ll get your order right, and you’ll create a stronger relationship.   

Enables adaptability to seasonal demands

In the example that we used earlier, you’ll notice that we used an annual sales figure. If you have a constant demand, this might be fine. But if you have a seasonal inventory subject to changes in consumer demand throughout the year, the formula allows you to choose a different period. In this case, we might choose a particular season instead of an annual period. 

If you sell sunglasses, you might expect to sell 10,000 pairs between April and September but only 3,000 from October to March. Using six-month periods would adjust your EOQ for high and low-demand periods.    

Elevates customer satisfaction and loyalty

Customers are understandably frustrated when their orders aren’t fulfilled on time. 86% of consumers would leave a brand after as few as two poor experiences.

EOQ ensures that shelves remain stocked. You’re constantly able to provide the items customers are looking for, strengthening brand sentiment and loyalty.  

Allows scalability and business growth

All businesses experience changes in demand. Whether this is an increase or a decrease, you’ll need to ensure that your inventory is correctly stocked. A regularly updated EOQ will ensure that you always have the stock to support your business's growth.  

Tips for implementing EOQ for small businesses

Economic order quantity can help your business in lots of ways. But how can it be implemented effectively? Let’s explore some top tips for implementing EOQ in your organization.  

Invest time and resources in accurate demand forecasting

A forecast is only as precise as the data that it's based on. Remember the elements that make up your EOQ: 

  • Order cost 
  • Holding cost 
  • Demand rate 

To keep your EOQ as accurate as possible, you must maintain a regularly updated set of order and sales records and the tools to support demand forecasting

Incorporate safety stock into your inventory management strategy

Safety stock is the extra stock that is only used in the event of a stock out and is an essential part of inventory management. EOQ doesn’t account for sudden, unexpected fluctuations in demand. If a product becomes unexpectedly popular, you might not have enough stock to accommodate demand. 

Safety stock is a failsafe should you experience an unexpected stockout. By having safety stock, you can avoid leaving customers disappointed and continue to offer a particular product.  

Use technology and inventory management systems.

Technology comes to the rescue to help with inventory management in many ways. One example is order tracking software. This helps to streamline your quote-to-cash processes,  improving accuracy and increasing profitability. The right solution can provide access to real-time inventory tracking and automated order processing. 

Another example is inventory management systems. These are a must for any business that deals with large amounts of stock. They can provide a variety of convenient functions, including: 

  • Purchasing stock more quickly. 
  • Fulfilling customer orders more effectively. 
  • Supporting product manufacturing. 

Most significantly, inventory management systems can provide easy access to the data needed to calculate your EOQ. This helps provide the most accurate forecasting and minimizes the risk of mistakes. 

Conduct training for relevant personnel

If you don’t have a mathematical brain, calculating EOQ can be daunting. And, of course, if you don’t get the calculation right, you’ll get the wrong insights. You might end up ordering too much or too little stock. 

That’s why you and your staff must have the skills to calculate EOQ effectively. Comprehensive training offers a simple solution for getting employees up to speed. Don’t allow yourself to be put off by the costs associated with training. You’ll find the benefits of accurate forecasting far outweigh any short-term costs.  

Regularly review and adjust your EOQ

If your business is scaling up, a regular review of your EOQ will enable you to maintain ideal order sizes even as your business grows. If you don’t do this, you could easily run out of stock and be unable to meet customer orders. Ensuring that your order levels are optimized isn’t just cost-effective; it's essential for building customer confidence.

If, on the other hand, some of your products are facing a downturn in sales, keeping your EOQ up to date will help you avoid excessive storage.

EOQ is an essential calculation 

Keeping a constantly stocked inventory is essential for all businesses. But choosing the right amount of stock is easier said than done. And, as many companies have found out the hard way, mistakes bring costly consequences. Calculating your business’ economic order quantity is a simple and effective way of avoiding this issue.

First, though, you need to make the correct calculation. The steps outlined in this document should help guide your forecasting. So, why not get started and start putting these tips into action?  

Frequently Asked Questions about Economic Order Quantity

What is EOQ? 

EOQ stands for economic order quantity. It’s a calculation that helps you to understand the ideal number of products to order. Properly calculated EOQ can reduce ordering and storage costs and minimize the risk of stockouts or overstocking. 

Does my company need EOQ? 

EOQ is an essential calculation that manages stock. This includes traditional brick-and-mortar stores and e-commerce websites. 

How is EOQ different from EPQ?

EPQ stands for economic production quantity. It's a calculation similar to EOQ, the only difference being that EPQ focuses on the production stage. EOQ, on the other hand, is calculated at the order stage. This calculation helps you better understand the optimal number of products to manufacture. 

How is EOQ different from MOQ? 

MOQ stands for minimum order quantity. Instead of looking at the maximum number of orders needed, it helps calculate the smallest number that can be purchased. Both MOQ and EOQ are necessary calculations that assist with inventory management

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