Inventory management economic order quantity

Inventory management is concerned with maintaining economic order quantities so that you order neither too much stock nor too little to meet your commitments. The stock level is dependent upon what it costs both in capital and in space needed to maintain such levels. Even if you employ a ship-to-line principle, you still need to determine the economic order quantities. Some items have a higher value than others, thereby requiring a higher degree of control. Use of the Pareto principle will probably reveal that 20%... 

This basic formula has been used to develop an economic order quantity (EOQ) model (Carroll, 1998 Huffman, 1996 Silbiger, 1999 Tootelian and Gaedeke, 1993). While the EOQ model may be difficult to derive and calculate, it is often incorporated into computer software used by many pharmacies to manage their inventory and make purchasing decisions. The EOQ model describes the level of inventory and reorder quantity at which the combined costs of purchasing and carrying inventory are at a minimum. The formula is... 

Fixed reorder quantity inventory model—A form of independent demand item management model in which an order for a fixed quantity, Q, is placed whenever stock on hand plus on order reaches a predetermined reorder level, R. The fixed order quantity Q may be determined by the economic order quantity, by a fixed order quantity (such as a carton or a truckload), or by another model yielding a fixed result. The reorder point R, may be deterministic or stochastic, and in either instance is large enough to cover the maximum expected demand during the replenishment lead time. Fixed reorder quantity models assume the existence of some form of a perpetual inventory record or some form of physical tracking, e.g., a two-bin system, that is able to determine when the reorder point is reached. These reorder systems are sometimes called fixed order quantity systems, lot-size systems, or order point-order quantity systems. 

Often it is the economics implicit in the FOQ equation, or a similar thought process, that governs decisions such as those made by production control and transportation managers up and down the supply chain. The company selling to the final customer orders material in fixed amounts from suppliers according to reorder points and minimum order quantities. Others back up the chain duplicate the behavior, leading to a supply chain bloated with extra inventory and operating expense. 

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