Order Quantity Problem: Economic Order Quantity (EOQ) Model
After various inventory items are classified on the basis of the ABC analysis, the management becomes aware of the type or control that would be appropriate for each of the three categories of the inventory items. The A group of items warrants the maximum attention and the most rigorous control. A key inventory problem particularly in respect of the Group A items relates to the determination of the size or quantity in which inventory will be acquired. In other words.
The EOQ mood, as the technique to determine the economic order quantity, illustrated by us, is based on three restrictive assumptions:
1. The firm knows with certainty the annual usage (consumption) of a particular item of inventory.
2. The rate at which the firm uses inventory is steady over time.
3. The orders placed to replenish inventory stocks are received at costly that, point in time when inventories reach zero.
In addition, it may also he assumed that ordering and carrying costs are constant over the range of possible inventory lewis being considered.