EOQ sets how much to order โ the quantity that minimises ordering + holding cost: EOQ = โ(2DS/H). Reorder point sets when: demand over the lead time, plus safety stock.
Safety stock buys protection against variability โ SS = zยทฯLT โ and the service level (z) you choose is a direct dial between holding cost and stockout risk. Each extra nine of availability costs disproportionately more stock.
Criticality breaks the formulas. For a critical, long-lead, rarely-failing item, EOQ says “hold none” but the stockout cost (a plant down for months) says “hold one”. These insurance spares are stocked on risk, not demand.
1 · The two-sided cost of a shelf
Every spare on the shelf is a bet against downtime, and like any bet it has a cost on both sides:
- The cost of holding โ capital tied up, warehousing, insurance, obsolescence, and the slow death of shelf life. A common figure is 15โ30% of the part’s value per year, just to keep it sitting there. Across a large plant the MRO storeroom can be tens of millions of dollars.
- The cost of not holding โ when the part isn’t there, a quick repair becomes an extended outage while you expedite, fabricate or wait. For a critical asset that lost-production cost can dwarf the part price a thousand-fold.
Good MRO management is the disciplined balancing of those two costs, item by item. The wrong answer in both directions is common: bloated stores full of obsolete parts and stockouts on the items that matter, because nothing was optimised โ everything was bought “to be safe.”
2 · How much to order: EOQ
For a regularly-consumed item, the economic order quantity finds the order size that minimises the sum of two opposing costs: order in big batches and you order rarely (low ordering cost) but carry a lot (high holding cost); order in dribs and you carry little but order constantly. The minimum sits where they cross:
The model below draws that U-shaped total-cost curve and marks the EOQ โ note how forgiving the bottom is.
3 · When to order: reorder point & safety stock
Ordering the right quantity is useless if you order too late. The reorder point (ROP) is the stock level that triggers a new order โ set so that, on average, stock runs down to the safety-stock cushion just as the new delivery arrives:
Service level is the dial. Choosing 95% vs 99% vs 99.9% availability directly sets z, and the safety stock โ and cost โ climb steeply for each extra nine, exactly like the availability nines. You buy high service levels only where the stockout consequence justifies it. Set the dials and watch EOQ, the reorder point and the cost trade-off move:
Interactive — Inventory optimisation
Live modelTotal annual cost vs order quantity
EOQ=โ(2DS/H) with H = unit cost ร 25%/yr carrying; SS=zยทฯยทโ(LT/52) where ฯ = variability ร weekly demand and z from the service level (inverse-normal); ROP = Dยท(LT/52) + SS; annual cost = SยทD/EOQ + HยทEOQ/2 + HยทSS. Assumes a continuous-review (Q,r) policy with normal demand โ illustrative of the trade-offs, not a stocking decision.4 · When the formulas don’t apply: insurance spares
The EOQ/reorder machinery assumes a part is consumed often enough to have a demand rate. Many of the most important spares aren’t: a spare rotor for a single critical compressor might fail once a decade, cost a fortune, and take a year to manufacture. Demand-based maths says hold none. Risk says otherwise. These are insurance (capital) spares, and they’re stocked on a different basis entirely:
This is why spare-parts stocking must be driven by criticality, not by part price or usage alone. A cheap, fast-moving bearing and a million-dollar, never-moving rotor need opposite strategies. The usual approach segments the storeroom:
- Consumable / fast-moving โ pure EOQ and reorder-point optimisation (often vendor-managed or min/max).
- Slow-moving but predictable โ reorder point with carefully chosen service level by criticality.
- Critical insurance spares โ risk-based decision per item; pooling across sites or OEM stocking agreements to share the cost.
- Obsolete / dead stock โ actively identified and disposed; the silent killer of MRO budgets.
MRO is the bridge between reliability and the storeroom. The demand rate that feeds EOQ comes from failure-rate and history data; the service level you choose per item should track its criticality; and the whole thing lives in the CMMS, where the bill of materials links parts to assets and reservations to planned work. A kitted, parts-ready job is impossible without it โ which is why MRO and planning are two halves of the same discipline Bluestream implements.
Key takeaways
- EOQ sets how much (โ(2DS/H)) and the reorder point sets when (lead-time demand + safety stock).
- Safety stock = zยทฯLT โ service level is the dial between holding cost and stockout risk, and the nines cost steeply.
- Criticality breaks the formulas โ critical, long-lead, rarely-failing items are insurance spares, stocked on risk not demand.
- Segment the storeroom and kill dead stock โ and drive every stocking decision from criticality and the CMMS.