Question

ABC Company in southwest UK manufactures leather lacing and kits. It consists of 5 Leather Factory stores of, which three are located in the UK and others are located in Europe. Recently the overall demand for its products has declined. Therefore, intermediate-term attempts to control costs have centered on forecasting demand and reducing inventory costs. To help ABC Company better manage its resources and more effectively respond to demand, management team is considering ways to improve its planning process by finding demand/inventory management methods that can reasonably predict demand six to eight weeks into the future, and establishing procedures for managing inventory costs.

• If ABC Company is considering using Economic Order Quantity (EOQ) to manage its inventory costs, answer the following question:

• What are the assumptions of the basic EOQ model, and to what extent do they limit the usefulness of the model?

Could the answer please be presented in report style, the question is worth 15% of a level 6 report with around 300-400 words maximum. Please do not simply copy and paste from google or a negative review will follow. Positive review will be received for quality answers, thanks in advance

Answer 1

Solutions:-

ASUMPTIONS OF BASIC EOQ MODEL AND TO WHAT EXTEND DO THEY LIMIT THE USEFULLNESS

INTRODUCTION

Every successful companies shall take timely decision regarding their inventory management, Cash flow management etc.. Here, we are looking about the assumptions of EOQ model and what extend do they limit the usefulness. One of the important decision to be taken by an organization in inventory management is how much to buy at a time ,or say for how much amount of inventory shall be place at a time .This is called Economic Order Quantity .The size of an order for which total of ordering cost and carrying cost are at a minimum.

ECONOMIC ORDER QUANTITY

The size of an order for which total of ordering and carrying cost are at a minimum. Carrying cost is the cost which are associated with the purchase or order of a material.in include cost to invite a quotation, documentation works like preparation of purchase orders, inspection cost etc..and carrying cost is the cost for holding /carrying of inventories in stores.it includes the cost of fund invested in inventories ,cost of storage etc..

The EOQ shall be calculated as per the formula given below:-

EOQ=√2AO/C

Here ,A=Annual Requirement of of raw material

         O=It Represents Ordering cost

         C=It represents carrying cost per unit per annum

ASSUMPTIONS OF EOQ

The calculation of Economic order of material to be purchased is subject to the following assumptions:-

a)Ordering cost per order and carrying cost per unit per annum are known and they are fixed.

b)Anticipated usage of material in unit is known

c)Cost per unit of material is constant and is known as well

d)the quantity of material ordered is received immediately. That means the lead time shall be zero

e)The assumption of EOQ model are the costs can be traded off. With the standard EOQ formula, the assumption EOQ model is that holding cost and ordering cost are the costs to be used.

EOQ CAN’T BE CONSIDER:-

EOQ is designed for stable demand situations. What will follow a list of scenario that are anything but steady state ,how ever Approach EOQ for inventory management is difficulty in the following situations:-

a)Seasonal Productions

b)Assumbly Lot sizes

c)Die Life

d)Space costs

CONCLUTIONS

From the above Discussion we can understand the assumptions and idea about the usefulness of EOQ for inventory management. There are in fact many economic order quantity formulas choose from each with different EOQ assumptions. Therefore ,if one does not fit the EOQ assumption of the requirement ,another EOQ formula shall be used. But,the EOQ shall be always correct, because it is based on certain assumption we discussed above and we found some situations that the EOQ cannot be considered for Inventory Management.