Eoq Formula
What assumption makes classic EOQ most vulnerable in manufacturing?
Stable, known demand with constant lead time and no quantity discounts; when those conditions fail, EOQ is still a baseline, but it must be adjusted with safety stock, supplier constraints, or lot-size economics.
What is the difference between EOQ and reorder point?
EOQ determines the optimal lot size per order, while reorder point determines the trigger level for placing the order; they solve different inventory-control problems.
What cost categories are usually captured in H?
Annual holding cost per unit commonly includes warehousing, capital cost, insurance, spoilage, shrink, and obsolescence, expressed per unit per year.
The economic order quantity (EOQ), also called the Wilson formula or economic buying quantity, is the order quantity that minimizes total annual ordering and holding costs. Calculated as √(2DS/H), where D is annual demand, S is cost per order, and H is annual holding cost per unit, EOQ serves as the baseline for replenishment lot-sizing decisions.
In a practical manufacturing or warehousing setting, EOQ sets the replenishment lot size for raw materials, components, and packaging. On the shop floor, it balances material availability against storage capacity. Planners pull annual usage from ERP or WMS records as D, use procurement, receiving, and purchase-order administration costs as S, and express H as annual carrying cost per unit, including storage, capital, insurance, shrink, and obsolescence. EOQ is paired with a reorder point: the formula determines how much to buy, while the reorder point determines when to buy. This prevents line-side stockouts without pushing days-on-hand too high. For high-run items with stable demand, consistent lot sizing reduces purchase-order volume and receiving congestion. The core tradeoff is that larger orders lower order frequency and admin burden but increase warehouse occupancy, tied-up capital, and aging inventory.
Demand volatility ignored: Annual-average EOQ underbuys during schedule spikes and overbuys during slow periods, causing line-starving stockouts or excess inventory when consumption changes.
Holding cost understated: Omitting insurance, damage, shrink, shelf-life, or obsolescence makes EOQ too large, overloading racks, increasing handling, and creating aging stock that cannot be issued.
Ordering cost mismeasured: Excluding receiving labor, inbound freight, inspection, dock congestion, or purchase-order processing makes EOQ too small, driving excessive purchase orders and receiving bottlenecks.