In Inventory control, what the assumptions underlying the Economic Order Quantity(EOQ)

Economic order quantity is defined as the ordering quantity which minimises the balance of cost between inventory holding costs and re-order costs.Underlying assumptions in an Economic Order Quantity model are:

  • That there is a known, constant stockholding cost
  • That there is a known, constant ordering cost,
  • That rates of demand are known,
  • That there is a known constant price per unit
  • That replenishment is made instantaneously, ie the whole batch is delivered at once.
  • That costs to be used in EOQ calculations must be marginal costs. Fixed costs are excluded.

Note that the rationale of EOQ ignores buffer stocks which are maintained to cater for variations in lead time and demand.

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