Sunday, May 11, 2008

Economic order quantity

Economic order quantity is that stage of inventory that minimizes the total of inventory holding cost and ordering cost. The framework used to decide this order quantity is also known as Wilson EOQ Model. The model was developed by F. W. Harris in 1913. But still R. H. Wilson is given credit for his early in-depth study of the model.

Underlying assumptions

The ordering cost is constant.
The annual (or monthly or whatever periodicity you desire, here we will use annual) demand for the item is stable over time and it is known to the firm.
Quantity discounts doesn't exist.
The order is received immediately after placing the order.

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