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Economic Order Quantity can take the guesswork out of reordering stock, find out how.

Would you like to know exactly when you need to reorder stock and how much you need to reorder?

Then you need to calculate your economic order quantity (EOQ).

EOQ – much like a reorder point formula – helps you take the guesswork out of stocking your warehouse and keeping up with customer demand.

We’ll show you how to use an EOQ formula, it’s advantages and disadvantages, and the one tool you need to optimize your use of EOQ and any other inventory formulas.

What is Economic Order Quantity?

Economic order quantity is the lowest amount of inventory you must order to meet peak customer demand without going out of stock and without producing obsolete inventory.

That’s the ideal use of EOQ.

Its purpose is to reduce inventory as much as possible to keep the cost of inventory as low as possible.

The EOQ model assumes that demand is constant and that inventory is depleted at a predictable rate. While this isn’t the case for many businesses, the model still helps companies better approximate when they need to replenish their inventory and how much they should order.

How Do You Calculate Economic Order Quantity?

To help you calculate EOQ, here is the formula from Kenneth Boyd, author of Cost Accounting for Dummies:

Economic order quantity uses three variables: demand, relevant ordering cost, and relevant carrying cost. Use them to set up an EOQ formula:

Demand: The demand, in units, for the product for a specific time period.
Relevant ordering cost: Ordering cost per purchase order.
Relevant carrying cost: Carrying costs for one unit. Assume the unit is in stock for the time period used for demand.

Note that the ordering cost is calculated per order. The carrying costs are calculated per unit. Here’s the formula for economic order quantity:

Economic order quantity = square root of [(2 x demand x ordering costs) ÷ carrying costs]

That’s easier to visualize as a regular formula:

Q is the economic order quantity (units). D is demand (units, often annual), S is ordering cost (per purchase order), and H is carrying cost per unit.

What are the Advantages of EOQ?

Economic order quantity has been successfully used for decades by businesses of all types, so it certainly has a few advantages.

Here are some of them:

Helps Lower Inventory Costs

The primary purpose of EOQ is to help keep inventory carrying costs as low as possible.

The more inventory you have on hand, the more you have to pay for insurance, taxes, security, etc.

Accurately calculating how much inventory you need will help you maintain a budget you can afford.

Makes Restocking Easy

Economic order quantity can help you understand how often you should be ordering. You may discover that ordering small quantities more often is better for your bottom line or vice versa.

By calculating how much you need in proportion to how much you sell over a given period of time, you can ensure you always have enough stock to satisfy your customers.

Helps You Find the Best Deal

Many vendors advertise deals throughout the year to entice you to buy more of their inventory which usually ends up increasing your cost of inventory even if you received a discounted price.

The EOQ model helps you purchase only what you’re going to use.

It’ll help you take advantage of a vendor deal if, after plugging the numbers into your EOQ formula, you find out you’re not overpurchasing but getting the right amount at a lower price.

What are the Disadvantages of EOQ?

While economic order quantity has some benefits and a long history of use, it’s not without its shortcomings.

Here are a couple of them:

Requires Numerous Assumptions

The largest complaint about EOQ is that it requires numerous assumptions.

The model assumes that there’s steady demand, steady sales, and fixed costs.

Plus, the basic EOQ model assumes you have a one-product business. If you sell multiple products, you’ll have to calculate and track each one separately.

Doesn’t Account for Fluctuations During Seasons

The biggest problem with assumptions of steady demand and steady sales in the EOQ model is that it doesn’t allow you to account for fluctuations in demand during holidays or particular seasons.

If your sales yo-yo throughout the year, then EOQ won’t be able to keep up.

How to Make EOQ Work for You

Realistically, you’re unlikely (and not lucky enough) to operate a business with fixed rates and steady sales that almost never fluctuate.

If you run a business similar to the rest of ours, then you’re constantly dealing with uncertainties in your reorder point and customer demand forecasts.

EOQ can still help you make more informed guesses about when and how much inventory should be ordered, but to make EOQ calculations work properly, you’re going to need a way to monitor and track your order quantities, reorder points, safety stock levels, etc.

With the right inventory management system, you could even forget about EOQ altogether and use more up-to-date formulas that automate reordering for all of your products.

Interested in such a system?

Then we can help…

Our Inventory Management System Can Improve EOQ or Make it Irrelevant

Whether you want to use economic order quantity or not, our cloud-based inventory management system will help you streamline your business processes. From tracking your inventory in real-time to producing up-to-the-minute reports on past sales and future projections, DEAR Inventory will make sure you avoid stockouts and obsolete inventory while effectively serving your customers.

Start your free 14-day trial of DEAR Inventory today!

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3PL Providers Increase Profits by Making Logistics Easy

3rd party logistics or 3PL services are rapidly becoming a crucial asset to businesses who want to be more efficient and productive by focusing on their core competencies.

A 2016 study revealed that 70{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of businesses who use 3rd party logistics say that it has contributed to improved customer service, and 75{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of all businesses polled say that 3PL providers offered new and innovative ways to improve logistics effectiveness.

And according to consulting firm Armstrong & Associates, 86 percent of domestic Fortune 500 companies use a 3PL provider.

Despite the growth the 3PL industry has seen over the last few years, many companies – perhaps yours included – are still confused about what exactly 3rd party logistics has to offer and are concerned it may not be the best fit for their business.

So we’ll give you a brief overview of the benefits of outsourcing your logistics to a third party and a few steps for finding and hiring the 3PL that’s right for your business.

But first, let’s make sure we’re on the same page about what exactly a 3rd party logistics provider is.

What Is a 3rd Party Logistics Provider?

A 3rd party logistics provider can handle anything related to logistics in your supply chain, such as:

Warehousing
Picking and Packing
Packaging
Transportation
Freight Forwarding
Inventory Management

3PL services can specialize in one of these in particular, or they can offer a bundle of them.

But is hiring a 3PL firm right for you?

Like so many things in business, it depends.

Most major companies do outsource at least some of their supply chain management. If you have a large stock, or you’re a retailer with a quickly growing business, then handling tasks like warehousing, packing, shipping, etc. can become way too much to handle internally.

If you’re a smaller company or lean startup, then a 3PL may not make sense financially, yet. Spreadsheets are cheap and may get you by for now, but as your business grows in size and complexity, you may want to take a second look at outsourcing to a 3rd party logistics service.

But, if you think a 3PL might be the right solution for your business, let’s look at some of the benefits they have to offer.

Benefits of 3PL Providers

The 3rd party logistics is growing so quickly because large and small companies alike recognize the need to reduce non-essential and inefficient in-house operations and processes. And 3PLs can help you do just that!

Let’s check out a few benefits of using a 3PL provider.

They Reduce Overhead and Labor Costs

This is the big one for many companies.

If you handle all your logistics in-house, you’ll have to pay for:

Employee hiring and training
Worker’s compensation and liability costs
Warehouse space
Transportation vehicles and fleet maintenance

But with 3rd party logistics, you pay the provider a single agreed upon rate to handle any and all of those details.

And since 3PL providers are experts at what they do, you won’t be spending money on costly mistakes made by inexperienced employees or operational failures caused by wear and tear on your equipment and facilities.

They Offer Lower Rates for Shipping

3PLs also have access to a large network of distribution resources. Since they ship thousands of packages each year, it’s essential for them to develop close relationships with other service providers to operate their business as efficiently as possible.

And a huge part of this is negotiating lower freight rates, lower shipping costs, and better discounts on the services they use.

It can take you years to build up the same network that an established 3PL provider already has by yourself, not to mention the opportunity cost of dedicating your time and attention to more important activities – which means outsourcing your logistics is a sure way to save on shipping costs.

They Have a Distributed Network of Warehouses

Even a relatively small 3rd party logistics service could likely have warehouses in California, Illinois, and Florida.

This puts them in a position to more efficiently distribute your stock for faster shipping throughout the states.

And if you find a 3PL that has warehouses in other countries, they could help you break into new markets through lower overseas shipping rates and more effective expediting of packages when needed.

They Allow You To Focus on Your Core Competencies

The rise in 3rd party logistics is being driven by the need for newly launched and established businesses alike to become leaner by focusing most of their efforts on core competencies.

Hiring a 3PL allows your team to focus on what you’re best at whether that’s manufacturing, marketing, selling, or all of the above, that doesn’t likely include logistics.

And by narrowing your focus, you’ll be able to provide better products and services through more efficient operations.

3 Steps for Hiring a 3PL Provider

3rd party logistics companies can differ dramatically from one another; this isn’t the case where you can take a relative shot in the dark and expect the majority of the benefits 3PLs can provide.

To find a 3rd party logistics service that truly maximizes your ROI by catering to your unique business needs while also adhering to industry standards, follow the steps below!

1. Choose the Right Kind of 3PL Service

Your business’ particular needs – the products you sell, where you sell them, and how fast you need your products shipped – will all determine which type of 3rd party logistics company you should choose.

Some are warehouse specific companies that also provide trucking services
Some are strictly freight shippers who also offer warehouses.
And others handle the managerial and technological aspects of your logistics while outsourcing shipping to a different 3PL

To help you find a logistics company that will best cater to your needs, check out this helpful list of 3PL providers in your area.

2. Request a Quote on All Services Provided

Once you have a list of 3PL providers you’re interested in, you’ll need to send a request for a quote.

The company you hire should be able to handle every requirement you have at a price you can afford, which means you’ll need to gather a list of requirements from your team to send to your potential 3rd party logistics providers.

Make a list of everything you think (or better yet, know!) makes sense to outsource and the details related to these, which might include:

All of the facilities that you’ll need to ship to and from.
Your average number of shipments per month.
Your current warehousing capacity.
Any special transportation requirements.

This list should be as detailed as possible. By giving a potential 3PL provider as many details as you can, you’ll be able to get a more accurate estimate and begin to build a strong working relationship.

3. Integrate Their Services with Your Systems

All 3PL providers have particular operational processes to maximize their efficiency, but you’ll also likely want them to adopt some of your systems in order to satisfy your unique requirements.

The best 3PL providers will use a “mix and match” strategy that identifies your current issues and works with your existing procedures while blending in their own strategies for success.

Perhaps most importantly, they should fully integrate with your inventory management systems so both of you know how much has been shipped, how much needs to be shipped, and how much you have in stock to ship.

To streamline this integration as much as possible, you should invest in a cloud-based inventory management system that makes it easy for both of you to automatically track orders and integrate your sales processes with their distribution systems.

With the right software, you’ll be able to easily send any orders you receive directly to your 3PL when they come through and they’ll be able to begin the fulfillment process in the shortest possible time.

Finding and integrating with a 3rd party logistics provider won’t be without its headaches, but for many businesses, the benefits far outweigh the costs.

And by following the steps we’ve listed here, you’ll be able to find a 3PL provider that helps you save money, improve efficiency, and expand your business.

Get Your Business Integration Ready

With a cloud-based inventory management system that automatically tracks all your sales, purchases, and stock levels, provides you real-time reports, and easily integrates with top business services, you’ll see time and cost savings both now and when you’re ready to bring on your new 3PL provider.

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