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The Economic Order-Quantity (EOQ) Model

In: Building Intuition

Author

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  • Leroy B. Schwarz

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.

Suggested Citation

  • Leroy B. Schwarz, 2008. "The Economic Order-Quantity (EOQ) Model," International Series in Operations Research & Management Science, in: Dilip Chhajed & Timothy J. Lowe (ed.), Building Intuition, chapter 8, pages 135-154, Springer.
    • Handle: RePEc:spr:isochp:978-0-387-73699-0_8
    DOI: 10.1007/978-0-387-73699-0_8
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    Citations

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    Cited by:

    1. Karzan Ghafour, 2017. "The Role of Items Quantity Constraint to Control the Optimal Economic Order Quantity," Modern Applied Science, Canadian Center of Science and Education, vol. 11(9), pages 1-61, September.
    2. Hossein Jahandideh & Kumar Rajaram & Kevin McCardle, 2020. "Production Campaign Planning Under Learning and Decay," Manufacturing & Service Operations Management, INFORMS, vol. 22(3), pages 615-632, May.
    3. Zhu, Yueying & Wang, Qiuping Alexandre & Li, Wei & Cai, Xu, 2017. "An analytic method for sensitivity analysis of complex systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 52-59.

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