Economic Order Quantities: Best Practices and Pitfalls

Posted on May 22, 2024 at 10:05 PM

Any company aims to improve its costs and revenue with the best economic model, thus, following an effective economic order quantities (EOQ) would be a great choice.

Moreover, the economic order quantity (EOQ) is known for its ability to determine the optimal order quantity while lowering inventory costs.

Today, we are going to share with you all about economic order quantities with details about the best EOQ practices, and benefits to help you meet the variable needs of your business.

What Is the Economic Order Quantity (EOQ)?

The term economic order quantities (EOQ) refers to the used formula to calculate and determine the optimal order quantity based on different factors to guarantee economic growth while minimising the bad impacts of hyperinflation and its economic consequences.

More than that, the main goal behind the economic order quantity (EOQ) is achieving the required balance rate between the holding costs and the ordering costs. That is why EOQ is a highly important technique in ecommerce businesses of all sizes.

Thus, calculating the economic order quantity helps make the decision to order the optimal quantity of the required units from each supplier, set the optimal supply chain, achieve customer demand, and avoid overstock or shortage in the inventory.

However, based on the best finance training courses in Dubai, the economic order quantity (EOQ) formula falls at the disadvantage of working based on fixed or unchanged conditions, including product demand, lead time, and other stable costs.

Best 5 Practices in Economic Order Quantities (EOQ):

To achieve and guarantee the best outcome from your economic order quantity (EOQ) model, then you need to calculate your EOQ formula and work based on these optimal order quantity practices:

1. Accurate Demand Forecasting:

The whole economic order quantity formula, known as the EOQ formula, works based on quantity forecasting, which should depend on the latest data and accurate insights.

As accurate data and numbers will not only help you anticipate future demand based on previous and current demands and patterns, but also help you manage, or even reduce, your holding costs, and inventory in the best way.

2. Consider All Relevant Costs:

The features of economic institution are stable, especially the costs part. As there are several inventory costs to consider, including the ordering cost, holding cost, and stock cost. 

Furthermore, this EOQ consideration will not only help you achieve quantity economic order quantity but also help you optimise your inventory costs in the best way.

3. Safety Stock Consideration:

Although the concept of economic order quantity (EOQ) formula revolves around optimal quantity order and inventory cost management, yet, you should include a safety margin to provide urgent quantity demand at the inventory and keep functioning even with supply delays.

This safety economic quantity order (EOQ) consideration will protect your company inventory from stock out and from revenue loss, moreover, from the high cost of speed ordering.

4. Use the Latest Inventory Management System:

Implementing a modern inventory management system will enhance your economic order quantity (EOQ) formula effectiveness, and balance your production levels. As you will gain accurate and updated calculated data about the total processes, costs, and optimum annual movements.

Moreover, you will benefit from the latest improvements and designed updates which help you facilitate your EOQ processes and inventory logistics and operations better.

5. Review Your Economic Order Quantity (EOQ) System:

As the economic order quantity system works for a specified time, then regularly reviewing and updating your EOQ system will help you minimise errors, avoid unnecessary costs, and even increase your revenue.

You can do so by updating your EOQ system, understanding your warehouse numbers, and determining the basic and new needs of your clients.

The Major Benefits of Economic Order Quantity (EOQ):

Whether you aim to improve your business working capital and debtors management, or just improve your inventory calculation and management. The effective economic order quantity formula will come back to you with these optimal benefits:

• Minimise holding cost and storage cost, as simply you will not hold extra units or products, rather than having the required amount based on your company's need.

• Purchase the ideal demanded amount of the required products or units which reduces your holding cost and improves your inventory management, moreover, protects businesses from item stockouts.

• Improve your inventory management with accurate numbers and data on your selling, timeline, purchasing, and inquiry.

• The economic order quantity helps you hold products and goods based on demand which is vital in reducing your overstocking or losing due to having expired products in your inventory.

Eventually, 

The economic order quantity (EOQ) is a great system that will help you get what your customers need when they need based on accurate and customised insights and data.

 Thus, train your team on the latest EOQ systems and start benefiting from them.