Economic Order Quantity Model:
The two significant decisions pertaining to controlling the inventory of a raw material are while to place an order and how much order to order. F. W. Harris produced a rule for finding out the optimal number of units of an item to purchase if many fundamental assumptions are satisfied. This proposed model is referred as the Basic Economic Order Quantity (EOQ) Model.
In more concise manner, it may be concluded that there exists for all of material held in inventory an optimal order quantity where whole annual stocking costs are at a minimum.
There exist certain supposition for the basic EOQ model that are summarized as follows:
1. The item's price or cost (p) is independent of the quantity ordered.
2. The demand for or usage of the item follows a comparatively constant rate of D units per unit time.
3. C0 is a fixed cost that is utilized for executing an order that is independent of the quantity ordered (Q).
4. There exists a proportional relationship among holding cost for inventories and Quantity stored.
5. When a demand arises in the market, it must be fulfilled. No shortages are permitted.
6. Lead time is known with assurance and is a constant quantity. this is referred to that time from while an order is placed until it gets delivered.
7. All of items ordered are delivered at the similar time, there are not split deliveries.