What is Economic Order Quantity?
Economic Order Quantity (EOQ) is a concept used in inventory management and represents the optimal order quantity a company should purchase to minimize its total inventory costs. These costs typically include order costs (like setup or ordering costs) and holding costs (such as storage, insurance, and potential obsolescence).
💡 The primary objective of the EOQ model is to find the balance between the frequency of orders and the quantity of each order so that the total costs of ordering and holding inventory are minimized.
Benefits of Using EOQ
Cost Efficiency: Helps in reducing total inventory costs by determining the most cost-effective quantity to order.
Inventory Level Optimization: By adhering to the EOQ model, businesses can avoid overstocking or understocking.
Enhanced Cash Flow Management: Reducing unnecessary stock helps in freeing up cash for other business needs.
How Recurrency Calculates EOQ
The formula we use for calculating EOQ is:
Where:
D: Yearly demand (units / year)
S: Replenishment cost per order ($ / order )
H: Holding cost per unit per year ($ / year)
C: Unit cost of the item ($ / unit )
The derived EOQ value indicates the ideal order size that minimizes the combined ordering and holding costs.
As your yearly demand and replenishment cost go up, you should buy more (to reduce the number of times you pay the fixed cost to replenish the item). Likewise, as your holding cost and unit cost go up, the total EOQ should go down. If something is very expensive to purchase, you are less willing to over purchase.
Updating your EOQ Settings
To optimize your Economic Order Quantity (EOQ) in alignment with your company's goals, organizations can adjust two key levers: replenishment costs and holding costs. These values, which can only be modified by your Admins, are set at the company level and significantly impact your EOQ calculations.
Consider your objectives: Are you aiming to avoid warehouse space constraints by keeping inventory lean? Do you find yourself holding inventory for extended periods due to slower turnover? Perhaps your priority is to turn inventory over quickly, or you have ample warehouse space and low storage costs.
Your goals can guide these adjustments. For instance, if you want to minimize stockouts and your suppliers are reliable for consistent order fulfillment, you might adjust your EOQ to ensure a higher turnover rate. Conversely, if your ordering process is highly automated, you might focus on reducing replenishment costs to streamline operations.
Adjusting Replenishment Cost and Holding Cost
💡 To give you a baseline from which to begin, Recurrency sets sensible defaults: $5.00 Replenishment Cost per order, and 20% Holding Cost a year.
That said, you can adjust this value, as well as the Holding Cost, from the Settings tab of the Demand Planning module. Follow these steps:
Navigate to the Settings module.
Within Demand Planning settings, locate the Replenishment Cost and Holding Cost Ratio fields.
Type in the desired values for Replenishment Cost and/or Holding Cost Ratio.
Click on Apply to save the changes.
Once the Replenishment Cost and/or Holding Cost Ratio values have been updated, the EOQ for each item will be recalculated, resulting in new Max recommendations.