Elasticity

Elasticity
Economic order quantity
How much to order ?
When to order ?
These two answers can be done by this one technique although there
are other advanced techniques are available, but EOQ model is one of
the basic model to understand the inventory management system.
• The most common approach to deciding how much of any particular item to order when
stock needs replenishing is called the economic order quantity (EOQ) approach. This
attempts to find the best balance between the advantages and disadvantages of holding
stock.
In 1915 the famous economic order quantity (EOQ) formula was developed. The
EOQ and its variations are still used widely in industry for independent demand inventory
management.
The EOQ model is based on the following assumptions:
1. The demand rate is constant, recurring, and known. For example, demand (or usage) is
100 units per day with no random variation, and demand is assumed to continue into the
indefinite future.
2. The lead time is constant and known. The lead time, from order placement to order delivery, is therefore always a fixed
number of days.
3. No stockouts are allowed. Since demand and lead time are constant, one can determine
exactly when to order inventory to avoid stockouts.
4. Items or materials are ordered or produced in a lot or batch, and the lot is placed into
inventory all at one time.
• 5. The unit item cost is constant, and no discounts are given for large purchases. The carrying cost is linearly
related to the average inventory level. The ordering or setup cost for each lot is fixed and is independent of
the number of items in that lot.
6. The item is a single item, without interactions with other inventory items