Detailed explanation of economic order quantity method and safety stock setting method in cross-border e-commerce

In the process of cross-border e-commerce operations, reasonable inventory control is crucial to increasing profit margins. On the one hand, the Economic Order Quantity (EOQ) method is widely used to determine the quantity of each order in order to minimize the sum of ordering costs and warehousing costs; on the other hand, the safety stock setting rule helps companies when facing Reduce the risk of out-of-stocks in times of uncertainty. This article aims to combine these two methods and explore how they work together to provide effective inventory management strategies for cross-border e-commerce.

Economic order quantity method

Basic concepts

Economic order quantity refers to the order quantity that can achieve the lowest total cost (including ordering cost and holding cost) under certain conditions. The purpose is to determine the optimal order quantity through scientific calculations to avoid additional expenses caused by too much or too little inventory.

Application prerequisites

• Just-in-time replenishment: Businesses can get the goods they need immediately, when they need them.
• Bulk delivery: Products should arrive all at once rather than in batches.
• No out-of-stock situations: Assume that no out-of-stock situations will occur at any time.
• Stable and Predictable Demand: Market demand remains constant and product prices are fixed.
• Guarantee of sufficient funds: The company’s financial status is good and the supply of supplies from suppliers is stable.

Calculation formula

The economic order quantity formula is: [Q^* = sqrt{frac{2DS}{C}}], where (Q^*) represents the economic order quantity; (D) is the annual demand; (S) is the cost of a single order; (C) is the annual storage fee.

For example, assume that Xiao Wang, a merchant on a cross-border e-commerce platform, sells a headset with an annual demand of 8,000 pieces, an order fee of 30 yuan per batch, and a unit inventory maintenance fee of 3 yuan/(piece ·year), then the economic order quantity calculated according to the above formula is 400 pieces.

Safety stock setting method

Goals

The main goal of safety stock setting is to ensure sufficient inventory to meet customer demand in an uncertain market environment and to prevent out-of-stocks due to supply chain interruptions or demand fluctuations.

Influencing factors

• Overstock
• Supplier Reliability
• Production Cycle
• Logistics efficiency
• Sales Forecast Accuracy

Method introduction

There are many methods for calculating safety stock for different situations, including but not limited to:

Max-Average formula

Suitable for products with large sales fluctuations but relatively stable supply cycles. The calculation formula is: [SS = (Max Sale times Max Lead Time) – (Average Sale times Average Lead Time)]. This method is simple and easy to implement, but it may cause large deviations in the results due to the influence of extreme values.

Normal distribution model

When there is uncertainty in demand or supply, safety stock can be estimated by calculating the standard deviation. Specific steps involve using Excel or other statistical tools to analyze historical data and determine the appropriate security factor (Z value) in combination with service level. For example, for a product with a 90% service rate, the safety factor is approximately 1.28.

Use in combination

In actual operations, companies often need to comprehensively consider the above two methods as well as other related factors such as the degree of ERP system support, changes in market trends, etc., and flexibly adjust inventory strategies to adapt to complex and changing operating environments.

It can be seen from the above introduction that the use of economic order batch method and safety stock setting method in the field of cross-border e-commerce can effectively help merchants optimize inventory structure, reduce costs and improve customer satisfaction. However, it is worth noting that although these theoretical models provide basic guiding ideas, the specific implementation needs to be adjusted and improved closely in conjunction with actual business characteristics.