Are you struggling to balance stock availability and cost reduction? 😩 Maintaining optimal inventory levels is crucial for eCommerce firms to meet customer demands without tying up too much capital in excess stock. But it’s a delicate balancing act! Too much inventory can lead to high storage costs and wasted resources, while understocking can result in out-of-stock and unhappy customers.

However, using the optimal inventory level formula, you can effectively navigate this challenge. In this blog, we’ll explore strategies to achieve optimal inventory levels, helping you avoid the pitfalls of both overstocking and understocking. But first, let's start with the definition of optimal inventory level.

What is Optimal Inventory Level, aka Economic Order Quantity (EOQ)?

The optimal inventory level, or Economic Order Quantity (EOQ), is the inventory level that effectively responds to customer demand. The goal of EOQ is to minimize total inventory costs, which include ordering costs, holding costs, and stockout costs.

Let’s discuss how suboptimal inventory levels can negatively impact your eCommerce store to understand the importance of optimal inventory levels.

Impact of Suboptimal Inventory Levels 📉

Holding an overly large inventory brings higher holding costs, including storage costs and obsolescence, making capital that could otherwise obtain more strategic uses unavailable. Being inundated with inventory can produce waste, especially in those areas related to perishable goods.

On the other hand, understocking can lead to missed sales opportunities, disappointed customers, and a loss of market share. According to a study by the IHL Group, retailers lose close to $1 trillion in sales yearly due to items being out of stock.

If customers can’t find what they need, they’ll go elsewhere, and you might lose them for good. Both overstocking and understocking hurt your cash flow and overall efficiency and cause stock issues. To avoid these, you need to optimize inventory levels.

This is where the optimal inventory level formula comes into play. By calculating the ideal order quantity, businesses can optimize their stock levels, ensuring they meet customer demand without incurring excessive costs. Let’s delve into the formula and how it can help you strike that perfect balance!

Optimal Inventory Level Formula / EOQ Formula

A standard formula for finding the best inventory level is the Economic Order Quantity (EOQ). The goal of the EOQ formula is to cut down on costs like inventory ordering costs and inventory holding costs. It estimates the best order size a business should purchase to meet demand while minimizing costs.

The Economic Order Quantity (EOQ) formula is:

Where:

• D = Demand rate (units per period)
• S = Ordering cost per order
• H = Holding cost per unit per period

Gaining insight into and following this formula allows businesses to decide wisely how much inventory to purchase each time, lowering the dangers of both overstocking and out-of-stock.

How to Calculate Optimal Inventory Level Step by Step? 🔍

Businesses can calculate their optimal inventory level, EOQ, and apply it to optimize their stock levels by following these steps:

1️⃣ Determine the Demand Rate (D): Calculate the total units needed throughout a specific period.

2️⃣ Calculate the Ordering Cost (S): Include all administrative and transportation costs when calculating the expenses that occur every time an order is processed.

3️⃣ Identify the Holding Cost (H): Predict the charges that come about as a result of possessing one unit in inventory at that time, which covers storage, insurance, and depreciation.

4️⃣ Apply the EOQ Formula: Put the above values into the Economic Order Quantity (EOQ) formula.

5️⃣ Adjust for Real-World Factors: Consider additional factors that feature unpredictable demand, the reliability of suppliers, and trends recognized from the season.

By consistently applying this formula, eCommerce businesses can optimize their stock levels effectively. Well, but what methods can they use for this calculation?

Methods for Calculating Economic Order Quantity (EOQ) 📊

To calculate optimal inventory levels, eCommerce store owners often rely on various methods, including manual solutions like Excel and advanced inventory management software.

1️⃣ Manual Calculations

Manual calculations involve using the EOQ formula by hand for each product. While this method allows for direct control, it becomes time-consuming as your product range grows. Additionally, there’s a high chance of human error in the calculations, which can lead to incorrect inventory levels.

2️⃣ Excel Spreadsheets

Using Excel to track inventory data and perform EOQ calculations is common among eCommerce stores. However, data management can become complicated and challenging as the number of SKUs increases. Excel doesn’t provide real-time updates, making it easy to miss changes in demand when calculating optimal inventory levels.

3️⃣ Advanced Inventory Management Software

Advanced inventory management software is more effective for calculating optimal inventory levels. Unlike manual calculations and Excel, these tools can automate data entry, calculations, and updates, saving you time and reducing the risk of errors. They provide real-time insights into stock levels and help you to make better inventory decisions. Additionally, many software options like Fabrikatör offer advanced analytics and forecasting capabilities. In this way, eCommerce stores can optimize their inventory based on reliable historical data and market trends. This proactive approach supports you to keep the stock levels balanced and improve customer satisfaction and operational efficiency.

To sum up, if you have a small and new eCommerce store, it might be possible to manually calculate your optimal inventory level. However, managing your inventory with more efficient methods—without leaving critical calculations like optimal inventory levels to chance—becomes essential as your store grows. You can always keep your inventory at optimal levels by using an automated inventory planning solution like Fabrikatör, designed specifically for the needs of growing eCommerce stores.

Leverage Fabrikatör for Optimizing Inventory Levels in eCommerce 📈

Optimal inventory levels mean responding to demand at the right time and completing product sales. To achieve this, your eCommerce store needs a few essential inventory management features that Fabrikatör offers:

Reach Optimal Inventory Levels by Forecasting Demand

Demand forecasting is key to maintaining optimal inventory levels. By accurately predicting future demand, eCommerce stores can ensure they have enough stock. In this way, they avoid stockout and overstock situations damaging their cash flow and causing increased holding costs.

Managing inventory levels becomes especially challenging before, during, and after peak seasons like Black Friday and Cyber Monday. Seasonal sales forecasting helps you adjust inventory for peak demand while avoiding excess stock afterward. This way, your inventory levels remain optimal, and you can maximize the efficiency of your sales.

Automate Replenishment for Maintaining Optimal Inventory Levels

Implementing automated restocking helps eCommerce businesses set smart reorder points based on real-time sales data. An efficient eCommerce replenishment helps optimize stock levels and replenishes inventory before running low. This strategy supports optimal inventory levels by reducing the need for manual intervention. It allows businesses to respond quickly to changing demand, a key factor in effective EOQ management.

Minimize Lead Time for Achieving Optimal Inventory Levels

Shortening lead time—the period between placing an order and receiving new inventory—is crucial for eCommerce operations. By minimizing lead time, businesses can operate with lower stock levels while meeting customer demands. This flexibility enables eCommerce companies to achieve optimal inventory levels and efficiently manage their Economic Order Quantity (EOQ), ensuring they have sufficient stock without extra costs.

Use Valuable Data Analytics for Informed Inventory Decisions

Leveraging data analytics allows eCommerce stores to analyze sales trends, customer preferences, and inventory performance. These insights empower businesses to make smarter inventory decisions and maintain optimal stock levels. By identifying patterns and predicting demand, data analytics helps keep inventory balanced and aligned with customer needs, minimizing the risks of overstock and stockout.

Improve Optimal Inventory Level with Early Purchase Orders

Streamlining the purchase order process is essential for managing inventory effectively in eCommerce. Businesses can quickly restock inventory by automating order recommendations based on demand forecasts and current stock levels. This helps prevent stockouts, so customers always find what they need. Besides, automating purchases helps determine the best order size and reduces unnecessary costs. Early purchase orders also improve relationships with suppliers by ensuring timely orders.

Keeping your inventory consistently at optimal levels without spending much time and energy is easy with the advanced features of Fabrikatör. If you have 30 minutes, check out these features in action!

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