The Economic Order-Quantity (EOQ) Model

Leroy B. Schwarz

Chapter 8 in Building Intuition, 2008, pp 135-154 from Springer

Abstract: The economic order-quantity model considers the tradeoff between ordering cost and storage cost in choosing the quantity to use in replenishing item inventories. A larger order-quantity reduces ordering frequency, and, hence ordering cost/ month, but requires holding a larger average inventory, which increases storage (holding) cost/month. On the other hand, a smaller order-quantity reduces average inventory but requires more frequent ordering and higher ordering cost/month. The cost- minimizing order-quantity is called the Economic Order Quantity (EOQ). This chapter builds intuition about the robustness of EOQ, which makes the model useful for management decision-making even if its inputs (parameters) are only known to be within a range of possible values. This chapter also provides intuition about choosing an inventory-management system, not just an EOQ.

Keywords: Order Quantity; Demand Rate; Average Inventory; Economic Order Quantity; Quantity Discount (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/978-0-387-73699-0_8

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