Question

As per the theory of EOQ procurement, orders for replenishments should be made exactly when the inventory levels fall from peak inventory to the re-order point (ROP). What will happen if this guideline is ignored – if orders are placed earlier or later than this event?

Use appropriate sketches to support your answer.

Answer 1

EOQ procurement is the method to minimize the cost of ordering and carrying the inventory. Ordering cost occurs whenever a new order is made. While carrying cost occurs for the period inventory is stored untill sales.

If we order less than EOQ quantity , we will have to order more number of times. So ordering cost will increase and carrying cost will reduce. But the increase in ordering cost will be more than the reduction in carrying cost and hence total cost will increase.

Similarly if we order more than EOQ , then we will have to order less but have to carry for more time and hence there will be increase in carrying cost more than the reduction in ordering cost and hence again total cost will be more than what it was at EOQ level.

So ordering EOQ quantity will insure minimum cost.