How to Find the Optimal Order Quantity Formula?

For eCommerce stores, maintaining the right inventory balance is a delicate act. Too much stock ties up capital and leads to holding costs, while too little results in missed sales opportunities. Finding the optimal order quantity helps stores navigate this balance by determining the best amount to order each time, minimizing costs and meeting customer demand effectively.

Let’s explore the optimal order quantity formula, why it’s essential for eCommerce, and how to calculate it.

Why Do eCommerce Stores Need Optimal Order Quantity?

Calculating the optimal order quantity, often called the Economic Order Quantity (EOQ), is critical for eCommerce stores aiming to manage their stock efficiently. Here’s why EOQ matters:

Reduced Inventory Costs: The EOQ formula helps stores minimize both ordering and holding costs. Ordering too frequently increases expenses related to shipments and handling, while ordering too much results in costly storage fees and potential waste if items don’t sell as quickly as anticipated.

Enhanced Cash Flow: By purchasing only the necessary amount of stock, businesses can avoid excessive inventory, freeing up capital for other priorities such as marketing and product development. This approach allows for more flexibility in responding to changing market trends.

Better Demand Responsiveness: Optimal order quantities ensure that stock levels match sales forecasts, reducing the risk of overstocking or stockouts. EOQ enables a store to adjust its inventory to meet expected demand without overspending, aligning purchasing decisions with customer needs.

More Predictable Operations: Knowing the right amount to order simplifies planning and improves operational efficiency, especially when combined with automated reorder points. With predictable order quantities, stores can avoid unnecessary disruptions in the supply chain.

How to Find the Optimal Order Quantity Formula?

The most widely used formula for calculating optimal order quantity is the Economic Order Quantity (EOQ) formula:

EOQ=2DSH\text{EOQ} = \sqrt{\frac{2DS}{H}}

EOQ=H2DS

where:

D = Annual demand (the expected number of units sold in a year).

S = Ordering cost per order (the expense incurred every time an order is placed).

H = Holding cost per unit per year (the cost of storing each unit in inventory).

This formula balances ordering and holding costs to determine the quantity that minimizes total inventory expenses. The EOQ model also considers the frequency of ordering; ordering too frequently increases costs, while ordering in excess leads to high holding costs. By finding the balance between these factors, EOQ helps businesses make cost-effective purchasing decisions.

Applying EOQ in Real Life

For instance, if an eCommerce store sells about 5,000 units per year, has an ordering cost of $100 per order, and a holding cost of $2 per unit per year, the EOQ would be:

EOQ=2×5000×1002=500000≈707 units\text{EOQ} = \sqrt{\frac{2 \times 5000 \times 100}{2}} = \sqrt{500000} \approx 707 \text{ units}

EOQ=22×5000×100

=500000

≈707 units

This calculation indicates that the business should order approximately 707 units each time to minimize costs. Using EOQ effectively can lead to a more streamlined and responsive inventory system, which is especially beneficial for fast-moving and seasonal items.

Limitations of EOQ for eCommerce

While EOQ is an effective tool for inventory management, it has limitations. EOQ assumes consistent demand and steady costs, which may not always apply in the dynamic world of eCommerce. Seasonal fluctuations, promotional campaigns, and shifting customer preferences can all impact demand, making EOQ less reliable on its own. Here, a robust forecasting model is essential, as it provides a clearer picture of demand trends, allowing for more accurate adjustments to order quantities.

How Fabrikatör Helps with Optimal Order Quantity and Forecasting

Fabrikatör’s inventory management platform combines EOQ with advanced demand forecasting, providing an adaptable solution for eCommerce stores. By integrating real-time data, Fabrikatör dynamically calculates optimal order quantities and automates reorder points, so you don’t have to rely solely on manual calculations.

With this data-driven approach, Fabrikatör helps ensure you always have the right amount of stock on hand—preventing both stockouts and excess inventory—while optimizing cash flow and lowering costs