The Logistician
  • Tiếng ViệtTiếng Việt
  • What to read today?
  • Knowledge
  • Insight
  • Podcast
  • Blog
  • Document
VIẾT BLOG
  • Login
  • Register
No Result
View All Result
  • What to read today?
  • Knowledge
  • Insight
  • Podcast
  • Blog
  • Document
VIẾT BLOG
  • Tiếng ViệtTiếng Việt
  • Login
  • Register
No Result
View All Result
The Logistician
No Result
View All Result

Need to reconsider the practicality when using, so is the EOQ model still relevant?

The gap between theory and practice is no longer a novel story, especially in doing business. There is a fact that the emergence of Lean and JIT has been urging managers to rethink the practice of the EOQ concept. So “Is EOQ still relevant?”

The Logistician by The Logistician
24/07/2021
in Blog
Cần cân nhắc lại tính thực tế khi sử dụng, vậy mô hình EOQ có còn phù hợp?

Image: Nhi Pham

EOQ – End of …?

EOQ is the acronym of Economic Order Quantity, which is the optimal order quantity calculated based on some assumptions. The EOQ calculation, which was studied and proposed in 1915 by Mr. Ford. W. Ham is considered as the most important analysis of inventory control and one of the most important inventions derived in any area of operations management. This is done to minimize inventory holding and order-related costs.

Economic Order Quantity (EOQ) model

The sudden appearance of JIT and Lean concepts, however, have been shaking the critical basement of EOQ. While JIT and Lean removes all wastes in inventory, every order only comes at the right time in the right quantity. EOQ requires an economic quantity, the items purchased in lots or batches and not continuously. It means that EOQ consumes more companies’ storage space, but the trend now is to eliminate all the wastes as much as possible. 

In addition, EOQ is only applicable in the condition of some unrealistic assumptions such as known and constant demands, no allowable shortages, known and variable cost and zero lead time. But in reality, no companies exist in this environment. Hence “the old school EOQ” sayings of many supply chain industry executives

So, is EOQ really the “End of …” ?

The answer is no, it is still valid as a basic analytic tool in many companies. The reason for EOQ being not applicable lies in the ways that they implement EOQ, but not EOQ itself. 

Who is most suitable for using EOQ?

In reality, EOQ still plays an essential role in operation management of many companies that deal with large volumes of stock as well as purchase-to-stock distributors and make-to-stock manufacturers. These are relevant in case materials only supplied by a limited number of suppliers or suppliers in a far distance. 

For manufacturers, EOQ is particularly applicable if the product utilizing the raw materials has a simple process structure and is produced continuously over time at a fairly uniform rate. 

By way of example, a chemical process manufacturer requires only a few major ingredients to yield a finished product because economic production run sizes are known and the production rate is relatively constant over a long time period. Therefore, many materials can be ordered in bulk on a quarterly or annual basis in container load, railcar load or truckload quantities.

The chemist uses only a few key ingredients to create the finished product

Additionally, business candidates for EOQ applications are those that have a steady demand for stock such as maintenance, repair and operating inventory (MRO). Such suitable candidates can include manufacturers with a highly repetitive production process with long runs; while retailers and high technology providers are the least likely candidates.

Some mistakes when using EOQ

Thomas Tanel, the president and CEO of CATTAN services Group Inc, had alarmed that many companies have never determined their cost of placing and processing a single purchase order (e.g., the time and extra cost to send in an order for an item, receive it, handle the supplier’s invoice and pay for it). This cost of placing and processing a single paper-based purchase order (PO) is often substantial. The cost impact of placing and processing a single PO in many instances is further aggravated by the higher receipt handling processing and inbound freight charges that may incur for smaller and more frequently delivered orders. The issues in determining the purchase cost influenced directly the EOQ calculation. 

In addition, many companies tend to ignore the change in demand during a period of manufacturing. In detail, EOQ is often calculated at the start of the year and companies have a tendency to stick to it without adjusting or even revision. This could lead to a period of stock out when demand is high or excess inventory building up in the warehouse. Because EOQ assumes that the entire order for an item is received into inventory at a given time. 

Another terribly rarely- discovered mistake is that EOQ treats all inventory items in the same way, regardless of their value to the business. Whereas, most companies pay no attention to this issue. This means these companies are wasting valuable space on items which are unnecessary to have in stock. 

What can be done to make EOQ become relevant again?

EOQ is great, but not in every case. Therefore, companies should consider when and how to implement EOQ  to calculate the most relevant Economic Order Quantity. 

Relating to this problem, Thomas Tanel developed some guidelines when implementing EOQ formula: 

  • The EOQ formula applies to products offered at a single price; therefore, if different prices or discounts are offered by your supplier based on quantity purchased, do not use EOQ.
  • It works best with normal predictable demand items. If seasonality is involved, EOQ gives you the order quantity independent of the increased or decreased seasonal demand. For items with seasonal demand, you will have to make an adjustment in your demand.
  • The EOQ formula assumes the price of goods acquired will not change during the time the order is in stock. If the item being ordered is subject to price volatility or the price is expected to increase or decrease, you should know how to stock ahead before a known upcoming price increase occurs and adjust the EOQ accordingly.

These guidelines after being introduced have gained a lot of support from business zones. However, in the modern world, it is advisable that companies should apply modern management systems with the support of Artificial Intelligence and IOT. 

Huyen Tran

Tags: EOQinsightssupply chain

Related Posts

​​Shell and CMA CGM signed an agreement to supply LNG fuel in Singapore

​​Shell and CMA CGM signed an agreement to supply LNG fuel in Singapore

01/07/2022
0
Private: TP Hồ Chí Minh xem xét chuyển đổi mục đích sử dụng một số khu công nghiệp sang logistics

Ho Chi Minh City considers converting some industrial parks into logistics

29/06/2022
0
Image: Thu Trang

DB Schenker’s agreement to acquire USA Truck

28/06/2022
0
Finding new suppliers after the unprecedented “Chicken-rice crisis” in Singapore

Finding new suppliers after the unprecedented “Chicken-rice crisis” in Singapore

22/06/2022
0
FedEx invests in FourKites to build intelligent supply chain platform

FedEx invests in FourKites to build intelligent supply chain platform

22/06/2022
0
LG Electronics “shake hand” with CJ Logistics to develop logistics robots

LG Electronics “shake hand” with CJ Logistics to develop logistics robots

19/06/2022
0

ĐỀ XUẤT NÊN ĐỌC

Sản lượng hàng hóa tại các cảng lớn ở Trung Quốc tăng 3.5% vào cuối tháng 6

Container volume at major Chinese ports up 3.5% in late June

3 years ago
0
“Lockdown” causes many difficulties in Southeast Asian countries

“Lockdown” causes many difficulties in Southeast Asian countries

2 years ago
0
Các hãng tàu đang tăng cường số lượng dịch vụ tại thị trường Nội Á

Booming intra-Asia trade pushes carriers to launch more services

3 years ago
0
Xu hướng dịch chuyển chuỗi cung ứng từ Trung Quốc sang Việt Nam bước vào giai đoạn 2 – tình hình khan hiếm container ngày càng nghiêm trọng

China-Vietnam sourcing shift enters phase two, bringing more box congestion

3 years ago
0
ADVERTISEMENT

THẺ NỔI BẬT

ACQUISITIONaircraftairlinesamazonAppleblockchainBoeingchinaCMA CGMcontainerContainer shortageCovid-19covid19crisisDHLe-commerceEVFTAexportfedexFoxconngoodsinfrastructureInvestmentLNGlogisticsLogistics centerM&Amaerskportport congestionRAILWAYRussiaRussia-Ukraineseasupply chainSupply chain disruptiontechnologyThai AirwaysthailandtransportusvietnamVietnam AirlineswalmartWarehouse
ADVERTISEMENT

TIN TỨC PHỔ BIẾN

  • Uniqlo Supply Chain Management

    Uniqlo Supply Chain Management

    0 shares
    Share 0 Tweet 0
  • Certificates that advance your career in Logistics and supply chain management

    0 shares
    Share 0 Tweet 0
  • Cross-docking: The key to Walmart’s great success

    0 shares
    Share 0 Tweet 0
  • How Aviation Fuel Differs From Regular Fuel

    0 shares
    Share 0 Tweet 0
Facebook Twitter Youtube RSS
The Logistician

© 2021 Copyright The Logistician - Designed by Đông Đô Media.,JSC.

  • Login
  • Sign Up
  • What to read today?
  • Knowledge
  • Insight
  • Podcast
  • Blog
  • Document
  • Tiếng ViệtTiếng Việt

© 2021 Copyright The Logistician - Designed by Đông Đô Media.,JSC.

Welcome Back!

Login to your account below

Forgotten Password? Sign Up

Create New Account!

Fill the forms below to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Add New Playlist

-
00:00
00:00

Danh sách

Update Required Flash plugin
-
00:00
00:00