Variables
Description
What is this formula?
Total Inventory Cost calculates the combined annual cost of ordering and holding inventory.
It is one of the fundamental inventory management equations and forms the basis of the Economic Order Quantity (EOQ) model.
When to use it
Use this formula when:
- Evaluating inventory policies.
- Comparing order quantities.
- Minimizing inventory costs.
- Designing replenishment strategies.
- Optimizing warehouse operations.
Example
A company has:
D = 24,000 units/year
S = 50 USD/order
Q = 1,000 units
H = 2 USD/unit/year
Formula:
TIC = (DS/Q) + (HQ/2)
Substitution:
TIC = (24,000×50/1,000) + (2×1,000/2)
TIC = 1,200 + 1,000
TIC = 2,200 USD/year
Result:
The total annual inventory cost is 2,200 USD.
Applications
- Inventory management
- EOQ analysis
- Supply chain optimization
- Warehouse planning
- Operations management
Note
This model includes only ordering and holding costs. Real inventory systems may also involve stockout costs, transportation costs, quantity discounts, insurance, taxes, and obsolescence costs.