Operations Management: An Integrated Approach, 5th Edition

WHY COMPANIES DON'T ALWAYS USE THE OPTIMAL ORDER QUANTITY

Even though it can be shown mathematically that not using the optimal EOQ quantity results in additional costs for a company, it is not unusual for companies to order a quantity other than the EOQ.

Some companies do not have known uniform demand. In some cases, companies experience lumpy demand (that is, some periods with significant demand and other periods with no demand). This violates one of the underlying assumptions of the EOQ model. In such cases, it is better to use a period-order quantity (discussed later in this chapter).

Some suppliers have a minimum order quantity that they will sell to a company. This minimum order quantity can be based on how the item is packaged. If the item comes in boxes of 1000, the minimum order for the item becomes 1000 pieces. If you need more than one box, you must order additional boxes. To obtain 4000 pieces, you would order four boxes. Some suppliers are willing to break boxes, but many are not. At other times, the minimum order quantity can be based on how the material is shipped. The minimum order quantity may be what is needed to qualify for a full truckload or full railcar load rate. There are also times when a company may not have sufficient storage capacity to accommodate a large order quantity. When that is the case, companies must order less than the EOQ.

Remember that the EOQ must be checked when quantity discounts are available. The basic model did not allow for discounts, ...