5 min read

Understanding Economic Order Quantity

September 16, 2021 by Srishti Arora - 5 min read

Planning is a major aspect of any eCommerce business. Be it inventory management or shipping, you need to plan everything in advance so that you can fulfill the orders seamlessly. Many times, eCommerce sellers falter on this strategic planning and order products only when they require it. This often leads to a delay in supply and eventually causes late delivery to customers. This not only impacts the overall customer experience but also reduces the chance of repeat purchases. 

With several tools available at your disposal, you must forecast demand beforehand to ensure that you do not fall short of inventory at any point. The economic order quantity is one such metric that can help you define the optimum amount of inventory that you need for your business.

With this article, let’s have a deeper look at the economic order quantity, its formula, and its significance.

What is Economic Order Quantity?

Economic order quantity refers to the most optimum size of a lot. It is a calculation that helps you find the most suitable order quantity for your business so you can reduce warehousing, fulfillment, and logistics costs. 

It gives you a fair idea of the inventory you need and you can place your orders with suppliers in accordance with that. 

Significance of Economic Order Quantity?

Calculating the EOQ has several benefits for your business. In order to maintain a seamless supply chain without any glitches, there needs to be a balance between supply and demand. Quantity will give you an idea of the amount you need to purchase based on the amount you sell. Let’s have a look at the benefits EOQ offers. 

Improved Efficiency

Calculating the economic order quantity can help you make better decisions for storing and managing inventory. EOQ Will give you a fair knowledge about the amount you need to order so that you can plan your warehousing and inventory management beforehand. If you randomly order inventory, you can have trouble storing it and it can eventually lead to a delay in order processing because of the inaccurate storage. 

Reduce Stock-Outs

The next main advantage of calculating the economic order quantity is its role in reducing stockouts. It can be extremely embarrassing when a customer is shopping on your website and suddenly the product they order goes out of stock. This often leaves you in a difficult situation and you either have to delay the delivery or source the product at the last minute. With EOQ, you will have a rough estimate of the product you need to stop so that you can fulfill orders seamlessly. 

Decrease Inventory Handling Cost

The inventory handling cost can be a difficult nut to crack and it can blow a hole in your budget if you do not take care of it regularly. You need to be very strategic about the type of products you order and the quantity in which you order them. The supply of products also takes up money and resources so continuously ordering inventory can be expensive. If you calculate the EOQ in advance, you can reduce the inventory handling and sourcing cost by a huge margin as you will know the amount you need to order. 

SR Fullfilment

Calculating Economic Order Quantity

Variables

Holding Cost

Holding cost refers to the carrying cost of holding the inventory in your warehouse. If you want to properly calculate the economic order quantity you will first need to determine the holding cost.

The formula for holding cost is as follows- 

Inventory Carrying/Holding Cost = Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory

Annual Demand

The annual demand refers to the number of orders you get for a particular product. You can determine this by seeing your previous sales and historical order data. 

Order Cost

The order cost is the average cost per purchase. This also includes the shipping and handling costs so you need to calculate the overall costs on a per order basis. 

Economic Order Quantity Formula

EOQ = square root of: [2SD] / H

S = Order costs 

D = Demand rate 

H = Holding costs 

Outsource With Shiprocket Fulfillment – Relieve the Stress of Matching Metrics

Calculating economic order quantity can be a difficult task because you need to do it regularly. In case you have a seasonal spike of orders, economic order quantity can vary throughout the year. However, if you outsource eCommerce fulfillment operations, high-tech solutions can do the job for you and you only need to do tea procuring of the inventory. 

Shiprocket fulfillment is one such 3PL fulfillment provider that can help you relieve the stress associated with matching metrics like economic order quantity. All you have to do is ship your inventory to our tech-enabled fulfillment centers located in different shipping zones across India. We have the latest warehouse management, order management, and inventory management software integrated into our warehouses that can help you predict demand and calculate your supply accordingly.

Not just this, with Shiprocket Fulfillment Testimonial so store inventory closer to buyers and deliver 3X faster, improve repeat purchase rate, reduce RTO, and provide customers a delightful delivery experience without unfortunate scenarios like stock out or accumulation of dead stock. 

Final Thoughts

Economic order quantity is definitely an important metric for managing and processing inventory. Make sure you keep track of this number if you want to maintain a balance between the supply and demand of products. Although, if you are looking for a solution that can help you do this job faster, 3PL fulfillment providers are the right pick for you.

Shiprocket Fulfillment features
September 16, 2021 by Srishti Arora

Leave a Reply

Your email address will not be published. Required fields are marked *