Question

Consider the following companies: Walmart General Motors A local doughnut shop with 2 employees Which of those companies is most likely to use the EOQ model for ordering inventor? And which is the least likely? Support your answer fully!

Answer 1

EOQ model:

Economic Order Quantity model is used to order regularly used items. The order quantity should be such that the total cost is the least.

As ordering quantity increases, the number of costs in a year decreases. Consequently , the cost of ordering per annum decreases(cost of manpower, transportation etc)

But with increase in order quantity, the average inventory holding increases and the cost of holding inventory increases(because of higher working capital, higher storage space etc)

At Economic Order Quantity, the total cost is the least . At this ordering quantity, annual cost of ordering equals annual cost of carrying inventory.

Companies like Walmart, General Motors have large number of items to be ordered. There are purchase departments with number of employees. Cost of ordering is high.

Hence, they require to use EOQ model to minimize the cost.

A doughnut shop with 2 employees does not have variety items to order and there is almost nil cost of ordering. Hence , they will order such that inventory carrying cost is minimum.

The order is given to a regular supplier just over phone.

Since the ordering cost is negligible, there is no need to use EOQ model.

Hence it is most likely that the doughnut shop will not use EOQ model whereas companies like Walmart, General Motors etc are likely to use EOQ model