What is a Fixed Order Quantity?
Fixed Order Quantity (FOQ) is an inventory management strategy where a predetermined order quantity is established and replenished when the inventory level reaches reorder point. This strategy helps to ensure that the right amount of stock is available to meet customer demand. It also helps to reduce the costs associated with ordering and holding inventory.
Significance of Fixed Order Quantity in E-commerce
FOQ is an important factor in e-commerce as it ensures that customers can receive the exact quantity of product they want without having to order more than they need. Here is some added advantages of fixed order quantity:
- FOQ helps to reduce the waste associated with overstocking and prevents the customer from being stuck with an excess of products they don’t need.
- It also helps to ensure that customers have a steady supply of the product they need, reducing the chances of running out of stock.
- Fixed order quantity helps to reduce the complexity of inventory management as it allows for bulk ordering and more efficient storage of products. It also helps to streamline the ordering process, making it easier and more efficient for customers.
Prerequisites to Set up Fixed Order Quantity
The prerequisites of fixed order quantity include –
1. The cost of ordering: The cost of an order includes the costs associated with placing and receiving an order, such as transportation costs, purchasing costs, and inventory holding costs.
2. The cost of carrying: The cost of carrying includes the costs associated with holding inventory, such as storage costs and the costs of capital.
3. The demand: The demand is the rate at which a company needs to replenish its inventory.
4. The lead time: The lead time is the time it takes for the supplier to deliver the inventory after the order has been placed.
5. Safety stock level: Companies should keep some additional inventory called safety stock to prevent stock-outs.
Use Case With Fixed Order Quantity
The company ABC has a regular order of 10 units of its product. ABC can use a fixed order quantity system to make sure that its inventory is always sufficient. The system will automatically order 10 units of the product when the inventory level reaches a certain threshold. Once the order is placed, the company can track the progress of the order and make sure that the inventory is always replenished.