QOE: the Backwards EOQ
by Matt Petersen - August 2012

Ordering quantities are recognized as straightforward numbers.  There are formulas, software tools and spreadsheet algorithms to generate an Economic Order Quantity (EOQ).  Stock Status systems use these values.  They are consistent with "just-in-time" approaches used by virtually every inventory operation today.  Or are they?

Every inventory operation should be planning for the future.  All inventory managers want to be ready for the days ahead and want to have stock available when needed.  The whole idea is to plan for the future and not look back.  With this in mind, it seems curious that EOQ values are based on the past rather than the future.

Most - if not all - Stock Status systems lack comprehensive forecasting.  This is the bedrock of planning for the future.  It is usually given short shrift and only basic forecasting is thought to be necessary.  In conjunction with this many systems consider how much was used last year - then determine what lot sizes (EOQ values) you should have been procuring.  If part usage is growing, these will be too small.  If part usage is declining, this will be too high. Most operations have a "QOE" - a backward EOQ.

How can an inventory operation correct this misconception and find the proper EOQ value?  Your approach should include the following:
  • Accurate Item costs
  • Accurate Ordering Cost values
  • Accurate Carrying Cost values
  • Comprehensive forecasting based on detailed history
  • Incorporation of manufacturer or supplier constraints (i.e., increments)
As we noted above, comprehensive forecasting is often the problem.  Without it, everything else is backward.  Only stable items with no change in usage patterns would have a reliable EOQ value.  Seasonal items, new items, declining items and sporadic items would not.  Compounded errors in "bill-of-material" calculations or "‘DRP" calculations would further distort these values. 

Since Stock Status systems are not concerned with forecasting - or provide only basic forecasting - how can anyone find a good EOQ calculation?

All Stock Status systems have the capability to accommodate "add on" or "bolt on" software.  Comprehensive forecasters are too many to count.  Many are inexpensive.  Only a few have unlimited capability to handle massive inventories - yet remain inexpensive and easy to install.  The "add on" forecaster of choice should be inexpensive, easy to install and easy for IT to interface.

Some of the key requirements for this specialty software should include the following:
  • Installs in minutes
  • Is reasonably priced
  • Can be customized by the end user
  • Provides multiple models to chose from
  • Automatically selects the best forecast model
  • Comes with a long and proven track record
  • No limit on the number of parts that can be processed
  • Able to read a variety of file formats from Stock Status
  • Calculates EOQ based on the projected forecast - not the past year
  • Is extremely easy to understand and use
  • Processes tens of thousands of parts in minutes
Forecasting services may look like an alternative, but they are costly.  The inventory manager lacks control since the software is not resident "in house".  If an inventory operation is using any kind of Stock Status system, then there should be ample computer power to license and install a resident forecaster.

Faced with the huge number of forecasters on the market today, the inventory manager may be intimidated.  It may seem impossible to separate the "pretenders" from the "contenders".  Each inventory manager has specific preferences which make one choice better than it might be for other companies.  This is fine.  As long as the above criteria are met, the choice will be a good one.

Don't look back to calculate a "QOE".  Forecast the future to calculate EOQ properly!

The Decision Associates' MIN Management System (MS) uses proven technology to calculate EOQ, MIN, MAX, and Safety Stock based on an accurate 'best model' forecast.  To learn more about MMS click MMSREF .