Retail Planning 101: Minimum Order Quantities, Order Sizing and Containerization in Inventory Planning and Purchasing

Order sizing is a crucial aspect of retail supply chain planning that is concerned with determining the optimal amount of inventory to order and when to place those orders. This decision can have a significant impact on the overall performance of the supply chain, as it affects costs, lead times, and the ability to meet customer demand. In this blog post, we will explore two important concepts in order sizing, minimum order quantity (MOQ) and economic order quantity (EOQ), and discuss specific cost and lead time considerations that should be taken into account when making these decisions.

Minimum Order Quantity (MOQ)

The minimum order quantity (MOQ) is the smallest amount of inventory that a supplier will sell to a retailer. This amount is typically set by the supplier and is meant to ensure that the order is cost-effective for them to fulfill. The MOQ is often set based on the supplier’s own inventory and production costs, and it is important for retailers to be aware of this when placing orders.

For example, a supplier of a certain product might have a MOQ of 10 units, meaning that they will only sell the product in quantities of 10 or more. If a retailer wants to order less than 10 units, they will have to pay a higher per-unit price or find another supplier. As a result, retailers must take into account the MOQ when planning their inventory levels, and should consider ordering larger quantities to take advantage of bulk discounts or reduced per-unit costs.

Economic Order Quantity (EOQ)

The economic order quantity (EOQ) is another important concept in order sizing that is used to determine the optimal amount of inventory to order. The EOQ is the point at which the total cost of ordering and holding inventory is minimized. It is calculated by taking into account the cost of placing an order, the cost of holding inventory, and the demand for the product.

For example, let’s say that a retailer sells a product with an annual demand of 10,000 units and a holding cost of $1 per unit per year. The cost of placing an order is $100. The EOQ would be calculated by using the formula:

EOQ = √(2DS/H)

Where D = annual demand, S = cost of placing an order, and H = holding cost.

Plugging in the numbers we get:

EOQ = √(2 * 10,000 * 100)/1 = √(2,000,000) = 1,414.

So in this example, the optimal order size would be 1,414 units. This means that the retailer should place orders for 1,414 units at a time in order to minimize the total cost of ordering and holding inventory. A powerful supply chain planning software can help do these calculations for you automatically and also present a time-phased view of supply and demand so you know what to buy and when and how much.

Lead Time Is Also Key!

When determining the EOQ, it is also important to consider lead time. Lead time is the amount of time it takes for an order to be received after it has been placed. It can vary depending on the supplier, the product, and the shipping method. Long lead times can affect the retailer’s ability to meet customer demand, so retailers should consider lead time when determining the EOQ, and may consider ordering more inventory to ensure that they have enough stock on hand to meet demand.

Containerization

In addition to MOQ and EOQ, containerization is another important aspect of order sizing in retail supply chain planning. Containerization is the practice of consolidating multiple smaller orders into a single, larger order that is shipped in a container. This can be an effective way to reduce costs and improve the efficiency of the supply chain.

There are several benefits of containerization for retailers. One of the main benefits is that it can help to reduce shipping costs. By consolidating multiple smaller orders into a single container, retailers can take advantage of economies of scale and negotiate lower shipping rates with their suppliers. This can result in significant cost savings, especially for retailers that import products from overseas.

Another benefit of containerization is that it can help to improve the efficiency of the supply chain. By consolidating orders, retailers can reduce the number of shipments that need to be managed, making it easier to track and manage inventory. This can also help to reduce the risk of stockouts and improve the ability to meet customer demand.

When containerization is used, retailers also have to consider the lead time as a factor. Containerization can also lead to longer lead times as the consolidation process can add additional time to the shipping process. Retailers should also consider the MOQ and EOQ when determining the optimal order size for containerization.

The Bottom Line (TL;DR) – order sizing is a crucial aspect of retail supply chain planning that is concerned with determining the optimal amount of inventory to order and when to place those orders. By considering concepts such as minimum order quantity (MOQ), economic order quantity (EOQ), and containerization, retailers can reduce costs, improve the efficiency of the supply chain and make sure they have enough stock on hand to meet customer demand. It is important for retailers to carefully evaluate their inventory levels, lead times, and other factors when making these decisions, in order to optimize their supply chain performance.