12 March 2023 Every company seeks its best market performance every day Every company seeks its best market performance every day, through healthy growth, strategies to increase competitiveness, and profitability. However, when it comes to implementing the perfect action plan for a company’s success, often a fundamental issue remains in the background: efficient inventory management. Good warehouse product management directly impacts Good warehouse product management directly impacts financial results in line with market demand. Therefore, accurately managing inventory is an important differentiating factor for the evolution of any business, as it forms the “backbone” and protects the entire operational structure of a company. One of the problems that can occur when talking about inventory management One of the problems that can occur when talking about inventory management is related to its control, namely the process of monitoring the outflows and inflows of products within the warehouse. Some companies on the market forgo good stock control and end up making the mistake of ordering more items than they actually need, as well as failing to purchase essential products, compromising the entire internal logistics, sales, and order shipping process. This scenario brings with it unnecessary losses, such as high maintenance costs This scenario brings with it unnecessary losses, such as high inventory maintenance costs, as excess items require more space within the warehouse, occupying spots that could be invested in seasonal products or products with high market demand, and also require special attention to control their quality preservation. In extreme cases, when they remain in the warehouse for a long time, they can cause losses and damage. On the other hand, in case of stock depletion, the company may fail to seize unique sales opportunities, as well as generate an unpleasant experience for its customers if the order is placed and not available for shipping. Therefore, if your warehouse is still experiencing any of the aforementioned cases Therefore, if your warehouse is still experiencing any of the aforementioned cases, which hinder your company’s growth and create discomfort for your consumers, it’s time to learn more about the Economic Order Quantity (EOQ) or Economic Purchase Lot (LEC) and how this calculation can help you, the manager, make the right product purchases for your stock and increasingly meet market demand. What is an Economic Purchase Lot (LEC)? The Economic Purchase Lot (LEC), also known as Economic Order Quantity (EOQ), is a calculation that helps determine the ideal quantity of items that should be purchased in stock, with the aim of achieving the minimum total cost, considering both storage expenses and expenses related to interest on tied-up capital and general purchase expenses. In other words, it is a methodology that helps define the ideal balance between the advantages and disadvantages of maintaining inventory, always seeking to reduce the total cost. Regardless of the segment your company operates in today, understanding the quantity Regardless of the segment your company operates in today, understanding the quantity of products required by your stock minimizes the risk of shortage or excess of goods in the warehouse and, consequently, helps your company reduce expenses and better serve its customers. The Economic Purchase Lot (LEC) reduces the occurrence of stock and production issues, therefore this metric is necessary in daily inventory management because it ensures that it is always monitored and allows a fixed order value to be applied whenever the exact moment for product replenishment is indicated. Advantages of calculating the Economic Purchase Lot (LEC) You have probably already understood the importance of good inventory management and how the calculation of the Economic Purchase Lot (LEC) can help you in this process of monitoring warehouse inflows and outflows. Additionally, it is possible to identify a series of positive factors that make the LEC a tool used by renowned companies in the market. Discover some of these advantages: 1. Reduce storage costs What expenses are incurred today in your inventory that could be avoided? This is a question that logistics managers aiming to increase productivity and optimize costs within a warehouse must frequently answer. We know that inventory represents the largest share of investments within a supply chain, so we must ensure that there is no overspending. And this is where the calculation of the Economic Purchase Lot (LEC) comes into play. 2. Avoid product unavailability Just as the calculation of the Economic Purchase Lot (LEC) avoids excessive expenses often caused by purchasing products in greater quantities than ideal, it is also possible to apply this calculation to avoid running out of essential products in your stock. With LEC, the company gains greater visibility into how much it sells and in what time period, which helps keep inventory always replenished. This avoids the company’s bad reputation caused by stockouts and ensures customer retention and a reduction in customer acquisition cost (CAC). 3. Avoid excess products Are your stocks idle? This could be the result of an excess of products and low consumer demand. This situation is linked to poor logistical planning of purchases for the supply chain. And this is where the Economic Purchase Lot (LEC) helps a lot, avoiding the accumulation of products in the warehouse, whether due to insufficient sales, complications, and errors in logistical management, or seasonality. An accurate forecast of the products you need in your inventory will prevent: 4. Take advantage of discounts and opportunities Planning your stock purchases, knowing which products sell more and which sell less, as well as understanding demand peaks and seasonal periods, makes it easier to take advantage of better prices, make larger quantity purchases, promotions, and negotiate discounts with key suppliers. This strategic practice allows you to optimize investments in products and increase the company’s profitability. 5. Assist in strategic decisions Strategy and planning are the keywords within warehouses. The best managers in the market are aware that when an action plan is well executed, the consequence will surely be a good result. Therefore, using the calculation of the Economic Purchase Lot (LEC) to your advantage will help make effective and assertive decisions, especially regarding the number of times, frequencies, and values at which a product should be purchased. How to calculate the Economic Purchase Lot (LEC)? Now that we understand the importance and advantages of calculating the Economic Purchase Lot (LEC), you might be wondering: “But how do I calculate and apply this formula in everyday inventory?”. We can say that it is simpler than it seems. The basic formula for the calculation is: The calculation requires knowledge of algebra, the kind we learned in high school. After understanding and identifying the variables in your warehouse, simply apply the numbers to the formula above, and you will arrive at the result. Let’s take a look at an example: Let’s say the demand for the year 2021 from a certain electronics company was 10,000 units. The order cost was about R$ 5,000.00. And the maintenance costs represented R$ 3.00 per unit, per year. By replacing the variables in the formula, we will have: After performing the calculation, you will arrive at a value of LEC = 5,774 units. Based on the 2021 results of the electronics company, the economic order quantity for its inventory is 5,774 units per order, with approximately two replenishments per year. Challenges in implementing the LEC calculation Although many companies already use the Economic Purchase Lot (LEC) calculation in their warehouses, attention must be paid to three main points before starting to reap the benefits of this methodology. When you choose to apply LEC to your stock, keep in mind the challenges: Outdated warehouse management systems: Outdated or obsolete inventory management software can provide incomplete data for analysis and calculation, which can lead to the loss of potential savings. Ensuring that your software is up-to-date and relying on vendors who frequently perform maintenance will make you confident in the data provided. Manual data entry: The result provided by the economic order quantity calculation is determined by the accuracy of stock information. Therefore, if today in your warehouse the entire logistics process relies on spreadsheets and manual records, these may contain outdated or inaccurate data, hindering the ability to obtain an assertive LEC. Business growth: The LEC formula is ideal for companies with constant inventory needs. With a rapidly growing business, relying on LEC can lead to stock shortages. Seasonal needs: Seasonality can make LEC more challenging, but not impossible. This is because there can be significant changes in customer demand throughout the year. Improve your inventory performance with WMS Okay, manager, now you understand what the Economic Purchase Lot (LEC) calculation is, how it can affect your inventory management, ways to implement it in your supply chain, and, of course, the attention you need to pay when choosing to apply the methodology to your inventory. However, it is important to emphasize that the LEC formula works well when demand and prices are constant throughout the year. In more complex scenarios, the best solution is to rely on the help of a Warehouse Management System (WMS). The software automatically calculates the quantities to be purchased, considering a series of variables and always aiming for savings, optimal use of space, and ensuring the best customer service. What is an Economic Order Quantity (EOQ) and what are the benefits for your warehouse? Deagor WMS per ecommerce può aiutarti!