The ever evolving e-commerce industry is a complete composition of both physical and virtual tools. E-com businesses strive hard to deliver the best experience to their customers. But everything comes at a price, and while doing so, companies often face unwanted overhead costs.
One very major part of these overheads comes from the inventory. So a new formula was conceptualized in the early twentieth century known as the Economic Order Quantity. For the sake of simplicity we’ll term is at EOQ.
EOQ refers to the ideal quantity of goods a company should purchase for its inventory, so that extra costs related to storage, handling and orders can be eliminated. In simpler terms, if you sell 1000 units of a product per year, costing your INR 5 for holding and INR 2 for order placement. The ideal order size according to EOQ will be 28.3 units.
There’s even a formula devised to calculate the EOQ value based upon the demand, order cost and holding cost inputs.
How can EOQ help with cost reduction in Supply Chain Management
EOQ is an important cash flow tool. It allows you to estimate the amount of units you need to eliminate miscellaneous costs associated with inventory management. Which eventually means that you do not have to involve more cash for purchasing inventory than needed. Resulting in a better allocation of cash funds and assets for different operations.
The EOQ formula is quite versatile and can be modified to suit or determine different order intervals or production levels. The formula helps determine a company’s reorder point. Which means that by using this formula, a company can determine when their inventory is falling to critical levels and it’s time to pull in a new batch of goods. This makes sure that there is no shortage of goods for fulfilling orders and the customers don’t have to abandon the store barehanded.
Limitations of using EOQ
EOQ is no doubt designed to be an enticing idea for e-commerce business owners. However, it is prone to certain limitations. While implementing the EOQ formula, the values for demand, ordering cost and holding cost are considered constant. Which is obviously not possible since at least the demand can never be constant for any e-commerce business.
This fact limits the formula for estimating proper values under the influence of demand changes, seasonal shopping events, purchase discounts for bulk procurement of inventory goods, and lost sales revenue due to inventory shortage.
However, the formula is still not useless as it might seem to some. It can be used to determine optimal inventory levels for a shorter interval of time, pertaining to different factors.
EOQ is an important tool for both big and small e-commerce companies. Since proper inventory management is the lifeline of stores selling physical products. The formula helps you obtain an estimated figure of the quantity of goods in your inventory, thus helping you reduce overheads.
Aaj Enterprises
