Economic Order Quantity.
The order size that minimises your total inventory cost (ordering + holding). Plus reorder point, safety stock, and how often to place orders. The classic Wilson formula adapted for Indian working-capital realities.
Safety Stock = Z × σ_D × √L
ROP = (D/365) × L + Safety Stock
Total Cost = D·C + (D/Q)·S + (Q/2)·H
Economic Order Quantity (EOQ)
EOQ finds the order size that minimizes total inventory cost — balancing ordering costs (more frequent orders = more cost) against holding costs (larger orders = more inventory tied up).
EOQ Formula
EOQ = √(2 × D × S / H)
Where D = annual demand, S = ordering cost per order, H = holding cost per unit per year.
Worked Example
Annual demand 12,000 units. Ordering cost ₹500 per order. Holding cost ₹15/unit/year.
- EOQ = √(2 × 12000 × 500 / 15) = √800,000 = 894 units
- Orders per year = 12,000 / 894 = ~13
- Order roughly every 4 weeks
EOQ Assumptions and Reality
The classic EOQ assumes:
- Constant demand (no seasonality)
- Constant ordering and holding costs
- Instant replenishment (no lead time variability)
- No quantity discounts
Real life violates these. Use EOQ as a starting point, then layer:
- Safety stock for demand variability
- Reorder point = lead-time demand + safety stock
- Quantity-discount adjustment if supplier offers bulk pricing
Reorder Point
ROP = (Daily demand × Lead time) + Safety stock
If lead time is 14 days and daily demand is 33 units, place order when stock reaches 14 × 33 = 462 units, plus safety stock for variability.
Related Tools
For demand forecasting basis, see Cycle Time. For takt-driven planning, Takt Time Calculator.