Economic Order Quantity and Economic Production Quantity Models Report

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The basic EOQ inventory control model is applied to identify a fixed order quantity to minimize the total annual costs of inventory. The EOQ model involves the following assumptions:

  • The involvement of a single product;
  • Throughout the year, demand is even;
  • Known annual demand requirements;
  • Lead time remains unchanged;
  • Quantity discounts are absent;
  • Each order corresponds to a single delivery (Stevenson, 2015).

The EOQ model may be highly beneficial as it minimizes holding and storage costs and provides specific information concerning particular businesses regarding the exact numbers of inventory to hold and re-order. However, the model’s basis of assumptions may be regarded as its disadvantage as it does not account for fluctuations. In addition, the EOQ model requires advanced math skills and makes inventory control substantively complicated.

Similar to the EOQ model, the EPQ inventory control model is used to determine order quantities that will be regarded as optimal for purchasing and subsequent manufacturing. The batch mode related to the EPQ model is commonly used in production. In general, the EPQ inventory control model is efficient due to the production of items in batches instead of continual production as the inventory grows with the growth of manufacturing. The assumptions of the EPQ model include:

  • The involvement of a single product;
  • Constant usage rate;
  • Known annual demand requirements;
  • While usage occurs continually, production occurs periodically;
  • Constant production rate;
  • Lead time remains unchanged;
  • Quantity discounts are absent (Stevenson, 2015).

If a company converts to the EPQ model, its order quantity (Q) will be less as it does not go entirely into inventory. Usage continually draws input and only left equipment goes to inventory.

Reference

Stevenson, W. J. (2015). Operations management (12th ed.). McGraw-Hill Education.

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