Approaches Homework Help

Approaches

The EOQ model em be illustrated by (i) the long analytical approach or trial and error approach, and (ii) the short cut or simple mathematical approach,

Trial and Error (Analytical) Approach

Given the total requirements of inventory during a given period of time depending upon the inventory planning horizon, a firm has different alternatives to purchase its inventories. For instance, it can buy its entire requirements in one single lot at the beginning of the inventory planning period. Alternatively, the inventories may be procured in small lots periodically, say weekly, monthly quarterly six monthly and so on. If the purchases are made in one lot of the average inventory holdings would be relatively large whereas it would be relatively small when the acquisition of inventory is in small lots: the smaller the lot, the lower the average inventory and vice-versa. High average inventory would involve high carrying costs. On the other hand, low inventory holdings are associated with high ordering cost, The error or long analytical approach for the dctennination of EOQ uses different permutations and combinations lots of inventory purchases so as to find out the least ordering and carrying cost combination. In other words, according to the approach, the carrying out acquisition costs for different sizes of orders to purchase inventories are computed and the order size with the lowest total cost (ordering plus carrying) of inventory is the economic order quantity.

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