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Dilfraz Singh, Lovely Professional University Unit 10: Economic Order Quantity

Unit 10: Economic Order Quantity Notes

CONTENTS
Objectives
Introduction
10.1 EOQ Model
10.1.1 EOQ Model with ‘Lead Time’

10.1.2 Fixed-time Period Models
10.1.3 Fixed-time Period Model with Safety Stock
10.2 More Complex Models
10.2.1 Quantity Discounts or Price-break Models

10.2.2 Variable Demand and Constant Lead Time
10.2.3 Variable Demands and Lead Times
10.3 Summary
10.4 Keywords
10.5 Self Assessment

10.6 Review Questions
10.7 Further Readings

Objectives

After studying this unit, you will be able to:
Describe the concept of fixed-order quantity system

Explain the uses of economic order quality models
Discuss schematic representation of the EOQ model

Introduction

The Economic Order Quantity Model is based on the assumptions that production is instantaneous.
There is no capacity constraint and the entire lot is produced simultaneously.
In EOQ it is also assumed that delivery is immediate and there is no time lag between production
and availability to satisfy demand. The demand is deterministic and there is no uncertainty
about the quantity or timing of demand. The demand is constant over time, and in fact it can
be represented as a straight line, so that if annual demand is 365 units, this translates into a
daily demand of one unit. A production run incurs a constant setup cost and the products can
be analysed singly. It means either there is only a single product or conditions exist that ensure
reparability of products.

10.1 EOQ Model

The EOQ model provides a solution to the problem of determining when an order should be
placed and how much should be ordered so as to minimize average annual variable costs. The

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