Economic Order Quantity (also known as the Wilson EOQ Model or simply the EOQ 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 1915, though R. H. Wilson is credited for his early in-depth analysis of the model.
Variables
- Q * = optimal order quantity
- C = cost per order event (not per unit)
- R = 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 (H = PF)
Formula
The single item EOQ formula is:
References
- Harris, F. W. Operations Cost (Factory Management Series), Chicago: Shaw (1915).
- Wilson, R. H. "A Scientific Routine for Stock Control" Harvard Business Review, 13, 116-128 (1934).