Economic Order Quantity (EOQ) is the order quantity that minimizes total holding and ordering cost. The EOQ calculation is the most important analysis of inventory control, and arguably one of the most important result derived in any area of operations management. Determine basic EOQ, there are some assumptions such as the demand and costs are known exactly, no shortages are allowed, and lead time is zero.
Although in real situation, manufacturing companies often get problem with the EOQ. When their batch, set-up costs are high, the EOQ can suggest very large batches which complicate production scheduling, give long lead times to customers, need excessive storage capacity, and leave too much capital tied-up in stocks. In practice, we can move some way away from EOQ and not get a significantly higher cost. Another problem is when EOQ occurs with discrete items. One of the main strengths of the EOQ is that the variable cost rises slowly near the optimal. The EOQ gives a good guideline, but if it cannot be used, a close approximation should give reasonable results. There is a simple procedure for checking whether it is better to round up or round down order sizes for discrete items. In other hand, beside those problems, somehow in practice there is also a delay for lead time.
It can be caused for several reason such as:
- Time for order preparation. Larger orders need time for designing items, going through some kind of tendering process, arranging finance, and so on.
- Time to get the order to right place in suppliers. For example is the recipients are away from their offices.
- Time at supplier. It can be happen for specially designed and made product.
- Time to get materials delivered from suppliers. It can take more time for special and complex delivery.
- Time to process the delivery
When those happen, actually a company can set a reorder level. Reorder level is time to place an order before the delivery is needed. For constant lead time and demand, the reorder level equals lead time demand minus any stock an order. The EOQ analysis is so benefit in use for a company to strengthen their order policy. EOQ can be adjust by any condition to make more relevant as well as give more economical factor to company in inventory control. (Bobby)