Question

What essential features of inventory management are successfully captured by the

“economic order quantity” model?

Answer 1

Inventories are carried to compensate fo the variability between the supply of an item and the demand for it. Inventory control involves balancing conflicting costs and balancing the cost of holding sufficient stock to provide a specified level of customer service with the cost of purchasing the inventory.

Economic order quantity (EOQ) represents the optimum order size , the quantity of a regularly ordered item to be purchase at a point in time that results in minimum total cost(i.e, the sum of ordering and carriying cost). The Economic Order Quantity is a set point designed to help companies minimize the cost of ordering and holding inventory. The cost of ordering inventory falls with the increase in ordering volume due to purchasing on economies of scale. However, as the size of inventory grows, the cost of holding the inventory rises. EOQ is the exact point that minimizes both of these inversely related costs.The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time.