Economic Order Quantity model

In 1913, F.W. Harris developed the economic order quantity (EOQ) model to determine the optimum order quantity. EOQ method is used to identify the order quantity that would minimize the total cost i.e. the sum of ordering and carrying costs.

The model makes the following assumptions:

• The price of the inventory item (p) is independent of the order quantity. It means that the benefits of economies of scale are not taken into consideration while purchasing.

• The cost of ordering (C₀) is fixed and is independent of the quantity ordered (Q).

• The total holding cost of inventories is proportional to the number of inventory items stored.

• Demand for a product or its usage rate is constant over time.

• Materials are always issued in equal quantities to the indenting departments and the inventory supply rate is always greater than or equal to the usage rate (i.e. there is no scope for shortage of inventory).

• The lead-time for material delivery is known with certainty and it remains constant.

• The quantity of inventory ordered is delivered in a single lot and there is no scope for splitting of deliveries.              

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