Question

When should you not use EOQ?

Answer 1

Economic Order Quantity, abbreviated as EOQ, is the order quantity that is used to minimize total inventory costs.

Order Quantity can be defined as the number of units which are added to the inventory each time when an order is placed.

Total Inventory Costs can be described as the sum of cost, that is, inventory acquisition cost or cost of purchase, ordering cost, holding cost.

In other words, EOQ means the lowest amount of inventory ordered to meet the peak customer demand without going out of stock and without producing outdated inventory. This situation is termed as the ideal of EOQ. The purpose of this is to reduce inventory as much as possible to keep the cost of inventory lowest.

When EOQ should not be used?

1. Constant demand- EOQ model is supposed to assume that the demand is constant and that the inventory is being used at a predictable rate. But when I reality this is not the case it becomes difficult to use EOQ model. And hence, the company should restrain from using this model for that time period.

2. Seasonal Fluctuation- EOQ model should not be used during the seasonal fluctional. EOQ model does not taken into account the fluctuations during holidays or particular seasons in the cost of inventory. Hence, during this time period EOQ model should not be followed.

3. Change in consumer demand- EOQ model assumes and works upon that the consumer demand is constant. But when the there are changes in consumer demands, seasonal changes in inventory cost, the EOQ cannot predict those business events, as for EOQ the demand remains Constant. And hence, keeping this in view EOQ should not be used during such times of fluctuations in demand.

4. Erratic changes in usages- During the times of erratic changes, this model should not be used. EOQ model presumes that the usage of material is predictable and also evenly distributed. But when the scenario changes this EOQ model becomes useless and hence should not be used.

5. Demand rate- This model works to its optimal potential when the demand rate for the year is known and is evenly spread throughout the year, when this is not the case, the demand rate is not known for the year, the EOQ model should not be used as this will not be the time when EOQ model will be able to work to its optimal potential.

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