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The Wilson Model, also known as the EOQ (Economic Order Quantity) system, is a very widely used stock management method to reduce inventory costs in a warehouse.
It is one of the simplest stock management models to implement, which is why it is so widely used. It focuses on calculating the appropriate quantity of each product or raw material order of a company to reduce its inventory costs to a minimum.
We will look at this method below, breaking down its characteristics, advantages, disadvantages and applications:
This model became popular in 1934 with the publication of an article by R.H. Wilson, after whom the model is named, but it was developed originally by the engineer Ford Whitman Harris when he worked in the company Westinghouse Corporation.
The method was created with the clear objective of systematising the goods that are periodically held in the warehouse and defining the quantity and date on which orders must be placed with suppliers.
Although this system is commonly used to systematise the purchase of raw materials, it is applicable to optimising the purchase of any product required by the company provided purchasing costs can be determined in order and storage terms.
The method is simple and based on a formula that helps to determine when and in what quantity company orders must be placed, taking into account demand and the company’s minimum safety stock.
To develop the model and calculation correctly, full knowledge is required of the company’s logistics processes and the various stages of the supply chain and decision-making process.
To develop the EOQ method, the following basic conditions or assumptions must be fulfilled in the company, otherwise the calculations cannot be made accurately:
To calculate the model formula, the following terms must be determined:
With these terms present, we arrive at the simplified formula that defines the optimum quantity for each company order (Q):
Applying the above theoretical formula to a practical example, let us assume that the fictitious company Sillas Grandes World SL distributes office chairs in its country and wants to know the optimum product quantity that it should place in its orders.
If this company has an annual demand of 6,000 chairs (D), the cost of each order or purchase, with all the resulting expenses (K), is €300, and the annual storage cost of each chair (G) is €5, what would be the optimum quantity of each order (Q)?
Following this formula, the optimum quantity for the company Sillas Grandes World SL would be 848.52 units for each order placed, so it would have to place 7.07 orders per year.
With these results, and following the Wilson or EOQ method, the company would achieve an optimum inventory level throughout its warehouse without incurring any excess stock or stock depletion.
The Wilson or EOQ method is widely used internationally for its advantages over other types of methods.
The main benefits of this system can be summarised as follows:
The main disadvantages of the Wilson model or EOQ system lie in the same above-considered assumptions, as they limit its application and make the model less practical for real situations with non-constant terms.
The main disadvantages of the model in detail are:
If you require advice on choosing the most appropriate storage system according to your warehouse needs, to optimise the available space or to implement a storage capacity expansion project, our team will be delighted to help you. Contact us here.