Since its inception, the Economic Order Quantity (EOQ) has become a widespread method used for inventory management and optimization. The EOQ formula, balancing ordering and carrying costs, is subject to some underlying assumptions like demand, ordering costs and inventory holding cost known and stable. But when applying EOQ to your specific supply chain however, other practical factors will pop up. Moore Stephens identified 4 extra factors to consider and some practical solutions!
- Inventory rotations
Case: for low-cost products (i.e. low cost to keep stock on hand), the EOQ method would usually propose high reorder quantities, which could lead to multiple years of stock for an item.
Solution: cap EOQ to a certain amount of time (eg. 6 months or 1 year). Capping reorder quantities is a straightforward way of getting the benefits of EOQ (fast, easy) without the theoretical extremes.
- Minimum Order Quantities
Case: the EOQ results in an order quantity of 100 pieces while your supplier has a MOQ of 125 pieces.
Solution: renegotiate with your supplier or accept the MOQ. In many cases, a relatively low overall cost difference would exist between ordering the exact theoretical EOQ or a rounded number (such as a MOQ). So use EOQ as guidance, and then try to find a good realistic balance, taking into account any MOQ or supplier restrictions.
- Packaging parameters
Case: the EOQ results in an order quantity of 5 pieces, while 1 pack is 8 pieces and 1 pallet is 24 pieces.
Solution: try to round your order quantity to a pallet quantity for ease of handling in the warehouse. If that is too high, round to a pack quantity. Again, use EOQ as guidance, and then try to find a good realistic balance between a theoretical optimum and practical constraints.
- Supplier restrictions
Case: the EOQ formula proposes a reorder quantity, which would lead to a delivery every 2 weeks to achieve optimal costs, but your supplier can only deliver once a month.
Solution: renegotiate with your supplier and, alternatively, recalculate the order quantity with the constraints your supplier imposes (eg: taking into account the extra cost your supplier might charge for smaller, more frequent deliveries). As such, you can determine a new optimum, taking into account these restrictions.