ADS Solutions Wholesale Distribution Software Blog

How to Find EOQ with Your Distribution Software Solution

“EOQ sits at the heart of inventory control, and good use of EOQ intelligence affects many areas of your business – namely cash flow, growth potential, and profitability.”

EOQ, or economic order quantity, is a powerful tool for distributors. ADS Solutions’ distribution management system allows distributors to manage inventory purchasing and stock levels based on desired service levels for specific products. Higher desired service levels typically require higher levels of stock and greater inventory carrying costs. Similarly, lower service levels are associated with lower levels of customer satisfaction. EOQ gives the distributor the ability to systematically set service level inputs and to generate recommended purchasing reports that optimize inventory levels.
“Optimizing your inventory levels” means that for each product and your chosen service level, you keep enough stock on hand to fulfill your customers’ orders in a timely fashion, yet keep your overhead costs to a minimum. The fewer goods you can stock for the shortest amount of time, but still manage to ship all your orders on-time, the better. EOQ sits at the heart of inventory control, and good use of EOQ intelligence affects many areas of your business – namely cash flow, growth potential, and profitability. In its most simplistic form, the equation looks like this:

Where D is your demand; S is your setup, or ordering cost; and H is your holding cost. The kind of EOQ calculated by sophisticated ERP software for distributors is based on a slightly more complicated mathematical equation that takes your safety stock levels, your vendor lead time, the product’s usage rate, multiple contributors to your carrying costs, and your transaction costs into consideration, and generates an optimal (or “economic”) order quantity. That said, the principle is the same as in the mathematical expression above.

Accurate EOQ Depends on Good Historical Data

The more accurate the historical data is that you use to substantiate lead times and usage rates, the more reliable your suggested EOQ-generated order quantity becomes. Properly used, EOQ can be a critical driver of profitability and growth in your business. Volumes have been written about EOQ, and a simplified summary such as this will hardly scratch the surface of this powerful facet of inventory optimization. As with all such tools, though, the better the information inputs, the better the value of the output.
Most ERP vendors like ADS Solutions distributors software will automatically track the transaction data that automatically feeds your EOQ algorithm. If your distribution management system doesn’t do this automatically, here are a few practical tips about how to most accurately track and record some of the information integral to an accurate EOQ calculation. Also remember that EOQ is a tool, a sophisticated and very powerful tool, but a tool nonetheless, so don’t overlook the importance of human interaction and input to the process.

Location, Location, Location

Record the sale and fulfillment of products in the proper location. If you have to move products from warehouse X to satisfy demand in region Y, be sure to associate the sale of this item in your distribution management system with region Y. You can see that if the demand is recorded as having come from warehouse X, then warehouse Y is likely to experience stock-outs in the future.

Note Date of Request – Not Just Delivery Date

Record when the customer wanted the product, even and especially if that date varies from the actual delivery date. Use the features on your distribution management system to help you keep track of seasonal requests that were lost to competitors because of your low inventory. Be sure to track ebbs and flows of orders tied to other predictors, too, like sales of ‘sister’ products.

Start Tracking Unfulfilled as Well as Fulfilled Requests

Record usage for what the customer actually orders. If you are out of stock, then you need to note that, even if you fill the order with another product. If all you record is record fulfilled order, you may not purchase enough to satisfy customer demand in the future.

EOQ Differs With Every Distribution Management System

Many of the more sophisticated ERP distribution software programs available today offer some type of demand forecasting or EOQ functionality; however, each will operate in its own unique way, and none are 100% foolproof. The application of human judgment to a distribution management system’s EOQ recommendation is the last part of this equation – and a critical one at that. Your ERP software should provide sound, logical, suggested economic order quantities, but your buyers need to overlay their professional experience and sound judgment to adjust recommendations based on your own unique business and specific industry, and have the ability to adjust or override system suggestions.

Inventory Stratification

Inventory Stratification – Putting Warehouse Management Systems and Stock Control Software to Work

Experienced distributors understand that from time to time, employing new inventory stratification techniques and making changes to storage locations in one’s warehouse can deliver greater efficiencies. The perfect time to do this is when business is slow, or when you have recently added or deleted even 5-15% of your inventory. A little effort goes a long way to helping build profits, and knowing how to leverage your software system is a terrific place to start. The kinds of ERP software that can help you do this this are:

  • stock control software
  • small business inventory software
  • wholesale inventory management software
  • warehouse management system
  • wholesale distribution software

There are three main methods of determining optimal placement of items in your warehouse. These are Inventory Stratification, Like-Items (also known as Family Grouping), and Special Considerations.

Distributors software can help you analyze and stratify your inventory in one of two ways: “ABC” categorization of the items, or by using a ratio for loading and unloading. ABC categorization comes from the 80-20 rule, attributed to Italian economist Vilfredo Pareto, and this may be familiar to you as Pareto’s law. He noticed that in the late 1800s, 80% of the Italian wealth was held by 20% of the population. Let “A” represent your fastest moving items, “B” the moderate movers, and “C” the items which move slowest. You may not need warehouse management software to tell you to place your “A” items so they are most accessible for storage and shipping. The disadvantage of applying the ABC method of inventory stratification may mean storing unlike items side by side, but if you prefer to organize your warehouse based on usage and frequency, this is the method of choice.

To fine-tune this method of organizing your warehouse for efficiencies of time and labor, leverage your warehouse management system or wholesale inventory management system to then drill down and increase accuracy by adding an SKU loading/unloading ratio to ABC stratification. ABC applies to the frequency of which items are used, and loading/unloading ratio factors in the handling of the items from the time it enters your warehouse to its shipment out. Basically, it is the ratio of the number of trips your workers have to make to get to the storage location versus the number of trips it takes to get the SKU from storage to its point of use. The higher the ratio, the more important it is for that SKU to be placed close to its point of use. Why use your inventory management software to help you determine this? Even small amounts of time savings that you reap from modifying your warehouse layout will result in a more efficient work environment. Time is money.

Like-Items, or Family Grouping, means placing like items with similar characteristics next to each other. Using this method, you house spoons with spoons, sprinkler heads with sprinkler heads, etc. You might also group SKUs that are frequently sold together, like all silverware items. Using your stock control software, you can gain insights into whether you will get efficiencies from grouping products together that have similar characteristics. Here, your employees might easier recognize locations, and this will give you the ability to create a zone location system within your distribution software. However, there can be challenges with this method of organization. Depending on your inventory, workers might inadvertently pick the wrong item if it is physically too close to the correct item. Check your distributors software to determine how often particular items are used in multiple family groups. If there is a lot of overlap, this may result in several homes of the same item within your warehouse.

Another method of grouping is by ‘special consideration’, which takes into account the unique way some items are received, stored, picked, packed and shipped. Take the example of very heavy items that might require special equipment for picking. That alone should influence the placement of that item in your warehouse. Other special considerations might be size, fragility, perishability, or whether the item is hazardous in any way.

These are proven methods for inventory stratification and warehouse organization that can help you gain efficiencies based on your particular product line. Weigh the benefits of greater efficiencies against the time it will take your staff to get accustomed to the changes. Most workers adjust quickly, and sometimes changes within your warehouse can keep them thinking.