THE EOQ MODEL

Name:

Course:

Tutor:

Date:

The EOQ Model

The types of costs minimized by the EOQ formula

The first one is the inventory holding cost, which is a representative of the capital cost incurred by the management. This covers all the costs spent on units, the space the units consume, deductions on inventory, and the desuetude allowances. These costs are measured as a product of unit and time, which define the rate of demand. The other cost is the cost on fixed orders. This represents all costs incurred in order placements but excludes the unit costs. Thus, this costs accounts for the costs incurred in the receiving and the placing of an order. When it comes to the case of manufacturing, it accounts for the costs of putting in place the necessary equipment in the production of order-quantity. These costs are very significant and must thus, be accounted for in any company (Schwarz, 2008).

The difference between the POQ model and the EOQ model

The EOQ model considers a tradeoff between the cost of ordering and the storage cost when choosing the amount to use in the replenishment of item inventories. The quantity of order is quite affected by the ordering frequency and this extends to affect the cost of ordering. Holding a larger inventory in average increases the storage costs in that particular month. On the other hand, the POQ model considers one product at any particular time. This is because the materials for production are not always received instantly. For the two, that is the EOQ and the POQ, they vary with relation to the order cost (Panneerselvam, 2012).

Effects of batch size restriction on organization’s ability to place orders

When there is a reduction in the size of batch due to batch restrictions, the waiting time for batches increases, and this is likely affect the rate of