Ordering products that aren’t used right away and then storing them in a warehouse costs you money. However, if you run out of a product, you risk losing customers. You must keep a flawlessly balanced inventory with as low costs as possible to maximise profit, which is not easy – but EOQ is here to help!
The EOQ model assists us in determining the appropriate order size to save inventory expenses. The approach considers that there are expenses associated with ordering and holding inventory, and the EOQ calculator can help you keep these costs as low as possible.
You can simply forecast your orders and keep your inventory under control thanks to the EOQ formula. The economic order quantity value indicates how many units you should order in order to reduce your holding and ordering costs.
You might use EOQ not only as a model for managing your inventory, but also for managing your company’s cash flow. Inventory costs have a considerable impact on the balance sheet of many businesses.
Maintain optimal inventory turnover and cost-cutting measures to boost your company’s profitability! The EOQ calculator could be a huge help to your business.
How do you figure up your EOQ?
To perform effectively, the economic order quantity formula necessitates a slew of information:
Demand for the product for which the EOQ is determined on a yearly basis;
The cost of retaining one unit of a product in inventory is known as the holding cost.
The order fee is the amount you must pay to place an order for a product.
Costs of ordering and holding, as well as demand, which should be consistent throughout the year; and
That’s it; you’ve acquired all of the information needed for the EOQ formula!
Why is the Economic Order Quantity formula required?
Managers and retailers frequently struggle to determine the exact amount of products they should order to replenish their stock of a certain item in day-to-day business.
Order quantity is a serious consideration: purchasing too many things raises your storage costs, while ordering too few items can result in an out-of-stock situation. Both are detrimental to any business and should be avoided at all costs to keep your operations running smoothly.
Mis-stocking can be avoided using the Economic Order Quantity (EOQ) calculation. It determines the optimal number of units to order so that the cost is minimal and the number of units is optimal.
When computing the EOQ, assumptions are made.
The EOQ is an excellent indicator for any company that deals with the purchase and sale of goods. It’s vital to keep in mind the following assumptions that the EOQ formula is built on:
1. Constantly increasing demand
The EOQ assumes that your product demand will be steady throughout the year. It does not take into account seasonal variations or demand fluctuations.
2. The expense of constant holding and ordering
The EOQ assumes that the cost of holding and ordering is constant, which isn’t necessarily the case. An rise or decrease in your transportation expenses, a change in your employees’ salaries, or rising warehouse rent can all have an impact on your expenditures and the calculations that go into the EOQ.
3. There are no discounts.
In addition, vendor discounts are not taken into account in the EOQ. A shop may find it advantageous to purchase a product in quantity from a vendor in order to receive a discount. In such circumstances, despite what the EOQ predicts, buying things in smaller payments can actually save the shop money.
Last but not least
Economic Order Quantity may not account for all of the variables that influence a company’s success, but it is still a useful tool for assisting an entrepreneur or management in making more informed decisions. The fact that the EOQ is dynamic and can be updated as your company expands makes it a fascinating tool. You can always alter the formula and generate a new EOQ to meet the current conditions if any of your inventory costs change.
Calculating your EOQ helps you strike a fair balance between your order and inventory costs, which are easy to miss in day-to-day operations. The EOQ formula isn’t meant to be followed literally, but it can help you keep track of your inventory in a more informed and efficient manner.