Also called economic batch quantity, Wilson formula
What is economic order quantity?
The order size where the cost of ordering and the cost of holding stock together come out lowest.
What else it is called
- Other names
- economic batch quantity, Wilson formula
- In French
- quantité économique de commande
Related entries
Understanding economic order quantity
A balance between two opposing costs. Ordering in small quantities means frequent orders and frequent setups, each carrying an administrative and changeover cost. Ordering in large quantities means fewer of those, but more cash sitting in the warehouse and more risk of material going obsolete or being damaged. The formula finds the point where the sum is lowest.
Two things are worth knowing before using it. The total cost curve is very flat near its minimum, so rounding to a sensible pack size or a truckload costs almost nothing. And the formula takes the setup cost as a given, which is exactly the assumption lean manufacturing refuses. If your changeover is four hours, the formula will correctly tell you to run big batches. Cut the changeover to twenty minutes and the right batch becomes much smaller, with everything that follows from that.
How it is calculated
Economic order quantity = the square root of (2 × annual demand × cost per order ÷ cost of holding one unit for a year)
Holding cost includes the money tied up, the space, the insurance and the risk of obsolescence, not just the warehouse rent.
In practice
Treat the ordering cost as a variable you can attack rather than a constant you must live with. The formula optimizes within today’s setup time; changeover reduction changes the answer entirely.
Frequently asked
Is this still relevant with lean manufacturing?
As a diagnostic, yes. It tells you what today’s setup costs are doing to your batch sizes. The lean objection is not that the arithmetic is wrong but that the setup cost it treats as fixed is the thing you should be reducing.