Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering...

Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs.

1) What's the impact of a positive lead time on EOQ?

2) Can supply chain managers in fast-fashion industries apply the EOQ model to manage their inventories? If yes, how? If no, why?

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Expert Solution

Answer 1.

Economic Order Quantity(EOQ): Economic order quantity is the number of units that a firm should order to keep its inventory cost low such as holding cost, ordering cost, and shortage cost. EOQ is the firm's optimal order quantity each time and also known as the optimum lot size for any order.

Lead time is the delay of sum of reordering delay and supply delay in the inventory control process. Reorder delay refers to the time at which an ordering opportunity arises again after finishing the inventory. Supply delay refers to the time taken by the supplier to deliver the goods once the order is confirmed.

Lead time duration is used to calculate Lead demand, safety stock, and reorder point and is one of the essential elements of inventory control. The inventory level will be high in case there is a longer lead time in the process.

Positive lead time means longer lead time effect on EOQ of any firm. Supply and reorder lead time will affect the operational performance and inventory control process of the firm. It is the firm's top priority to reduce the lead time of the firm. In a positive lead time, we need to increase the EOQ quantity that will cost more handling and order charges. The inventory level should be increased with proportionate to the lead time. Higher the lead time means higher the storage cost as well.

Answer 2.

The fast fashion industry refers to apparel or clothing designs that are moving fast from the design center to stores to meet new trends for customers every time. In the fast fashion industry, the quantity of goods is delivered in small batches. In the fast fashion industry, inventory planning is crucial as the trend would be for a shorter time and it is difficult to apply the EOQ system as it has a lead time and reorders point. Because it has a volatile demand, the fashion that is in trend today, tomorrow it will be replaced by other trends

The fast fashion industry has a shorter lifecycle and response to the product by the customer is faster than other products and the demand will increase suddenly and decrease suddenly. So using the EOQ system will not be a great value for this industry.

The main assumption of EOQ is the demand should be constant and the total demand for the product should be known in advance. But in the fast fashion industry, both the condition may not apply. So using EOQ technique for inventroy controlling in Fast fashion industry will not be feasible.

keosha answered 1 week ago

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