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also known as Wilson EOQ Model orWilson Formula The model was
developed by Ford W. Harris in 1913, but R. H. Wilson, a consultant who
applied it extensively, is given credit for his in-depth analysis
EOQ applies only when demand for a product is constant over the year and each
new order is delivered in full when inventory reaches zero. There is a fixed cost for each
order placed, regardless of the number of units ordered. There is also a cost for each
unit held in storage, commonly known as holding cost, sometimes expressed as a
percentage of the purchase cost of the item.
Formula
Following is the formula for the economic order quantity (EOQ) model:
Holding cost (Carrying costs) represent the costs incurred on holding inventory in
hand.
h=lc
Example 1
A local distributor for a national tire company expects to sell approximately 9,600 steel-
belted radial tires of a certain size and tread design next year. Annual carrying cost is
$16 per tire, and ordering cost is $75. The distributor operates 288 days a year.
Given:
D = (Demand in units per year)
9,600 tires per year
*Note that D and H must be in the same units, e.g., months, years.
'Sensitivity Analysis'
A technique used to determine how different values of an
independent variable will impact a particular dependent variable
under a given set of assumptions. This technique is used within
specific boundaries that will depend on one or more input
variables, such as the effect that changes in interest rates will
have on a bond's price.