Question

What are the effects of the following on EOQ?

1. Lumpy demand

2. Minimum order quantities

3. Transportation costs

4. Quantity discounts

Answer 1

1. A lumpy demand increases EOQ, because the manufacturer is not very sure what will be the market demand due to uncertainty persistent in the market. Thus, he will have to hold extra inventory in order to meet any uncertainty, and this extra inventory will eventually lead to high storage costs.

2. Minimum Order Quantities will lead to reduced EOQs because minimizing the purchase of input will eventually lead to lower inventory management costs.

3. Transportation costs adds to the cost of EOQ, because if the transportation costs for reaching a particular place or region are generally high, then the people of that region will want to hold an adequate stock of goods in order to maintain a constant consumption level.

4. Quantity discounts reduce the burden of holding large inventories as people will generally want to buy goods in bulk if they are getting discounts on it. Thus, high demand for goods in the market will reduce the cost of holding inventory, and thus will have a positive effect on EOQ.