Wilson’s Formula

Wilson's Formula, also known as the Economic Order Quantity (EOQ) model, is a mathematical formula used to determine the ideal order size that minimizes the total costs of inventory holding, including ordering costs and storage costs. This formula is an essential tool within inventory management and procurement planning, as it helps businesses achieve a balance between having sufficient stock to meet demand and minimizing the costs of holding this stock.

Rackbeat February 8, 2024

How Wilson’s Formula Looks

Wilson’s Formula takes into account three main components to calculate the optimal order size: Annual consumption (D): The total amount of an item expected to be used or sold over a year. Ordering costs (S): Costs associated with placing an order, regardless of the order size. This can include administration, shipping, and handling. Storage costs (H): Costs associated with storing one unit of the item in inventory for a year, including storage space, insurance, and obsolescence.

The formula is as follows:

 EOQ = \sqrt{\frac{2DS}{H}}

Where: EOQ – is the economic order quantity. D – is the annual demand. S – is the ordering costs per order. H – is the storage costs per unit per year.

 

Example of Using Wilson’s Formula

Assume:

  • Annual demand (DDDDDD) = 10,000 units
  • Ordering cost (SSSSSS) = 200 DKK per order
  • Holding cost (HHHHHH) = 50 DKK per unit per year

 

 EOQ = \sqrt{\frac{2 \cdot 10,000 \cdot 200}{50}} = \sqrt{80,000} \approx 282.84 , \text{units}

In this example, the optimal order quantity is 283 units per order.

 

The Benefits of Using Wilson’s Formula

  • Reduction of total inventory costs: Helps to find the most cost-effective balance between ordering and storage costs.
  • Improved inventory management: Ensures that the company neither has too much nor too little stock, which optimizes inventory levels.
  • Supports decision-making: Provides a concrete, data-driven basis for purchasing decisions.
  • Integration with modern inventory management systems like Rackbeat.

 

Limitations of Wilson’s Formula

  • Assumes constant demand and lead time, which is rarely realistic.
  • Ignores bulk discounts, which could reduce total costs.
  • Assumes constant holding costs per unit, even though these may vary over time.
  • Does not account for uncertainties like delays or sudden changes in demand.
  • Presumes that the entire order is delivered at once, which is not always practical.
  • Is less suitable for complex supply chains or products with short shelf lives.

 

Optimize Your Inventory Management with Rackbeat

While Wilson’s Formula offers a solid starting point for calculating the economic order size, the modern reality is often more complex, and businesses can benefit from integrating these calculations with an advanced inventory management system like Rackbeat. Rackbeat can help to automate and further refine the process by accounting for real-time variables and dynamics, such as seasonal demand fluctuations, suppliers’ lead times, and changes in costs.

This ensures that businesses are not only basing their purchasing strategies on historical data and mathematical models but also on current insights and market dynamics. By combining the classical approach that Wilson’s Formula offers with the advanced features of an inventory management system like Rackbeat, companies can achieve a more accurate, flexible, and efficient inventory management.

Book a Free Demo