Having an available inventory of parts, tools, and other materials is critical in maintenance. But keeping too many of these materials can lead to high inventory costs or the cost of buying, handling, and storing the inventory. This is where economic order quantity, or EOQ, comes in. EOQ helps maintenance managers in keeping sufficient inventory while minimizing the costs of having them.
In maintenance, economic order quantity is the ideal number of units and order frequency for an item to meet facility demands and minimize inventory costs. EOQ is calculated by taking the square root of two times your total demand per year (D) times the cost per order (S), divided by the holding cost per unit per year (H). The formula is:
EOQ = √ (2 x D x S) / H
EOQ is a valuable tool for achieving efficiency in maintenance operations. When the parts, tools, or materials needed are always available, your team accomplishes more work orders and minimizes downtime in operations. Well-equipped technicians are also more effective and feel safer in completing their tasks.
Furthermore, EOQ helps limit costs by limiting overstocking. Ordering and storing too many maintenance parts, tools, etc., uses cash that could be of better use in other areas of your business. Keeping inventory also comes with overhead costs, such as paying for delivery or stocking staff, lighting or ventilating stock rooms, etc. In addition, overstocking results in a higher cost of spoilage or expiration of items.
The effective use of EOQ depends on understanding your maintenance program, the processes involved, and the maintenance history of your assets. Below are some tips when using EOQ when optimizing your maintenance inventory.
The timing of orders is fundamental when it comes to inventory management. Consider the frequency of orders when computing for the EOQ. If the demand for an item is high, you can increase your EOQ or look into increasing your order frequency. Adjusting your timing to meet your demand while maintaining EOQ can be a valuable technique in minimizing ordering costs, storage costs, and other inventory costs.
Poor data recording or missing data can cause errors in computing EOQ. Make sure that you gather all relevant maintenance information and double-check your records. Any EOQ values you come up with should be evaluated or monitored to ensure that they apply to the items in question.
Maintenance demand is not constant. Account for the unpredictability of maintenance work and accept that your EOQ is not a fixed value. Assets may require more maintenance over time, but that does not always translate to increased EOQ. Always evaluate your EOQs and maintenance demand. If you see signs of slowing or increasing demand, be flexible and adjust your EOQs to prevent stock shortage or overstocking.
Focusing on preventive maintenance lets you plan your maintenance more easily and with less unpredictability. Because preventive maintenance involves regular and scheduled maintenance work, forecasting inventory demands is easier. In addition, preventive maintenance effectively minimizes emergency tasks, allowing you to save on the urgency costs of essential items. It is also easier to postpone preventive maintenance until the budget and other resources are available.
Having established EOQ on your items lets you leverage order quantities to get discounts, freebies, and other incentives. It’s a waste if you don’t take advantage of such deals. Small discounts can accumulate and result in significant savings over time.
Economic order quantity is most useful in managing inventory if based on current and accurate data. This is possible with a computerized maintenance management system (CMMS). With a CMMS like Redlist, you can update your inventory automatically as you accomplish tasks. Its powerful computing abilities can help you analyze trends and compute EOQs at the click of a button. It also allows you to plan and schedule purchase orders, track inventory levels, and set up alerts or reminders when stocks reach critical levels. For more info on inventory control with Redlist, schedule a free demo today!