Definition: The Economic Order Quantity (EOQ) model can be defined as a traditional economic model which is used to determine the economic or the most optimal order quantity. This quantity of products or materials should be purchased or produced by the company according to the definite period of time which is fixed.
The EOQ model is developed to minimize the company’s total costs in relation to the order, including the complex of inventory holding costs and the ordering or setup costs (Collier & Evans, 2011, p. 241). It is necessary to pay attention to the key assumptions in relation to which the EOQ model is developed. These assumptions are the constant ordering cost, the constant lead time, the impossibility to provide stock outs, and the focus on only one product at a time (Collier & Evans, 2011, p. 243).
Role: The EOQ model is actively used by economists within companies to plan the operations because this quantitative model allows the significant decrease of costs. Moreover, the model is based on the constant or regular pattern, and the total costs can be successfully predicted (Collier & Evans, 2011, p. 243). The quantitative model is important to determine the optimal order quantity to purchase or produce that is why its usage contributes to minimizing the possible inventory costs.
However, it is necessary to refer to the lead time, the fixed demand rate, and annual demand to develop the model and determine the costs. Furthermore, depending only on the order quantity, the EOQ model rejects the importance of fixed ordering or inventory holding costs. As a result, it is important to concentrate only on variable ordering and inventory holding costs while using the EOQ model (Collier & Evans, 2011, p. 244).
Applicability: The EOQ model can be successfully used with references to any sphere in which the company realizes definite operations connected with purchasing and producing goods and materials.
Different companies are often challenged to use the EOQ model in order to determine the quantity of materials or products to purchase or produce in relation to the most beneficial conditions and with saving the maximum of costs (Collier & Evans, 2011, p. 246). Using the EOQ model, the company as a purchaser is able to order the quantity of materials or products which is the most appropriate for this period of time and for this situation with references to the inventory holding and ordering costs.
McDonald’s Corporation also uses the EOQ model in order to determine the most optimal order quantity and minimal costs while ordering materials and products or developing the system of producing the brand’s foods. The transport costs and inventory costs are important to be taken into consideration in spite of the industry.
The optimal order quantity in relation to purchasing definite products for McDonald’s Corporation should contribute to minimizing the summed up annual ordering and inventory holding costs while following the fixed volume of demand.
Thus, McDonald’s Corporation develops its brand strategy basing on the high quality of products and the speed of services provided (McDonald’s Corporation: Annual Report 2011, 2012).
The situation of ordering the inadequate quantity of definite products can result in problems with using the products and their realization in time, and the problem can involve the issues of increasing the holding costs along with the possible further growth of ordering costs. That is why, the usage of the EOQ model is important to provide the effective realization of McDonald’s products with references to the optimal order of the necessary materials and goods.
References
Collier, D. A., & Evans, J. R. (2011). OM 3. USA: Cengage Learning.
McDonald’s Corporation: Annual Report 2011. Web.