EOQ

When Can EOQ be Implemented?

Executive Summary

  • The question of when can EOQ be implemented is critical to the appropriate planning of products.
  • We cover when to apply EOQ versus forecast based planning.

Introduction

The question of when can EOQ be implemented is critical to determine when to use a non-forecast based method of supply planning (reorder points) and forecast based planning (like MRP).

See our references for this article and related articles at this link.

When Can EOQ be Implemented

Reorder points, and EOQ or Economic Order Quantity are probably the easiest planning method to understand. They are often based upon an EOQ, which determines the batch size (or instead can be based upon the minimum order quantity). From there, the EOQ is calculated, which accounts for the typical demand as well as the average lead-time.

Before the development of procedural supply planning systems, EOQ and reorder points were commonly used for the deployment. Different methods can be used for the initial supply plan and the deployment plan.

Coverage of EOQ

There are very few books that cover EOQ in much detail. I am not sure why this is, but I have an inkling that it is because inventory parameters are considered passé. EOQ is covered in many supply chain books, but it is almost always from a high level, with most stopping at simply explaining the EOQ calculation. We provide an online EOQ calculator in the article How to Best Use the Economic Order Quantity Calculator.

On the other hand, there seem to be innumerable books on Lean. I find it strange how Lean could be considered a “hot” topic, while EOQ would be regarded as passé because EOQ is one of the dominant methods within the Lean toolkit. For some reason, Lean books tend to be promotional. There are some consultants who work in Lean, and clearly, many of these books are designed to help increase their consulting business.

In terms of the academic literature, there is quite a bit on the topic of EOQ, with older publications providing a more basic EOQ coverage, and with more modern releases providing quite esoteric EOQ calculations.

The rule of when to apply EOQ is simple. However, the specifics of how to create a threshold for mathematically determining when a product location combination should be placed on a forecast based planning approach like MRP and when it should be placed on a non-forecast based approach is a bit more involved. And is something we cover in the article How to Understand Segmentation Versus Inventory Optimization.

Conclusion

EOQ can be created in a customized fashion. That is, it is not necessary to use the standard EOQ formula, and in many cases, it is not a good idea.

We developed an approach where reorder points are calculated externally, which allows for a higher degree of control. And for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level, and a picture of what is happening to the overall system. Calculating individual parameters like EOQ without an appreciation for the systemwide does not make any sense.