Inventory control
EOQ and reorder pointhow much stock to holdstocking policysafety stock maths
Economic order quantity, reorder point, safety stock and turnover: how much to order, when to order it and what buffer to keep.
Economic Order Quantity (Wilson EOQ)
Order size that minimises the sum of ordering cost and holding cost: the square root of twice the annual demand times the cost per order, divided by the annual cost of holding one unit.
Reorder Point
Stock level that should trigger the next order: the quantity consumed during the supplier's lead time, so the last unit leaves the shelf as the replacement arrives.
Safety Stock (Statistical Buffer)
Buffer that absorbs demand variability over the lead time: a service-level z value times the standard deviation of daily demand times the square root of the lead time in days.
Inventory Turnover Ratio
How many times a year the stockroom empties and refills: cost of goods sold divided by the average value of inventory on hand.
Z-Score (Standard Score)
How many standard deviations a value sits above or below the mean, turning any measurement into a comparable standard score.
How they fit together
A stocking policy is two decisions, and these formulas split cleanly along that line. EOQ answers how much, by balancing the cost of placing an order against the cost of holding what arrives. Reorder point answers when, by counting the demand that will pass while the supplier is filling the order. Get one right and the other wrong and you still run out, or still drown in stock.
EOQ has a property worth knowing before you argue with a supplier about pallet quantities: the total cost curve is remarkably flat near the optimum. Order 50% more than EOQ and total cost rises about 8%. That is why the formula's reverse direction is so useful. Ask instead what holding cost would have to be true for the pallet quantity to be optimal, and you usually find the argument is not worth having.
Safety stock is the piece that acknowledges reality, since demand and lead time both vary. It needs a service-level z value, which is why the z-score sits in this set: 1.65 for 95%, 2.33 for 99%. The square root on the lead time is the part people miss. Quadrupling the lead time only doubles the buffer, and going from 95% to 99% service costs about 40% more stock for four points of coverage. Chasing the last percent is where inventory budgets go to die. Turnover is the scoreboard afterwards, and it is the number a lender or an auditor will actually ask for.