Fundamentals of Business

Economic order quantity

Economic order quantity (also known as the Wilson EOQ Model or simply the EOQ Model Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. The model was originally developed by F. W. Harris in 1913, though R. H. Wilson is credited for his early in depth analysis of the model.

Underlying assumptions

1. the monthly (annual) demand for the item is known, deterministic and constant
2. the lead time is known and constant
3. the receipt of the order occurs in a single instant and immediately after ordering it
4. quantity discounts are not calculated as part of the model
5. the ordering cost is constant

Variables

Q = optimal order quantity
C = cost per order event ( not per unit)
R = monthly (annual) demand of the product
P = purchase cost per unit
F = holding cost factor; the factor of the purchase cost that is used as the holding cost (this is usually set at 10-15%, though circumstances can require any setting from 0 to 1)
H = holding cost per unit per month (per year) ( H = PF)

Formula