Determine the ideal order quantity that minimizes total inventory carrying costs and order processing expenses, plus calculate exact Reorder Point (ROP).
How the Wilson EOQ Model Works
The Economic Order Quantity (EOQ) formula balances two opposing inventory costs:
Ordering Costs: Fixed costs per purchase order (PO generation, paperwork, logistics coordination). Decreases per unit as order size increases.
Carrying / Holding Costs: Warehouse rent, capital interest, insurance, shrinkage. Increases linearly with average inventory.
The point where ordering cost equals holding cost is your minimum total cost operating point.
Formula
EOQ = √ ( (2 × Annual Demand × Ordering Cost) / Holding Cost Per Unit Per Year ) Total Annual Cost = (Demand / EOQ × Ordering Cost) + (EOQ / 2 × Holding Cost) Reorder Point (ROP) = (Daily Sales × Lead Time in Days) + Safety Stock
Frequently Asked Questions
In India, annual inventory holding costs typically range between 18% to 25% of unit cost (including 10–13% cost of working capital finance, 4–6% storage & handling, 2–4% pilferage & obsolescence).
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ROP is the threshold inventory level that triggers a new replenishment order to prevent stockouts before the supplier delivers.