Economic Order Quantity Models in Relation to the RealWorld
Recently. criticizing classical inventory models eems fashionable to some members of industry and consulting groups. Proportionately, there is much less open criticism from academia. In a manufacturing environment, the major weaknesses associated with the classical EOQ models focus on the numbers. These numbers are the values assigned to setup costs, holding costs, and demands used in the equations. These costs are often very difficult 10.
measure and, therefore. are error prone. Also, demand is rarely constant but instead is usually
a fluctuating number. Elliott Weiss states the problem nicely by explaining that many users of the equations
focus on optimizing a et of numbers that often are taken as a given fact. I Rather, he states, we should be managing lot sizing and inventory control. The current moves toward reduced inventory costs and quantities, such as just-in-time systems, stress the importance of reducing lot sizes. The means to reducing lot sizes is to reduce setup time and ost. When smaller l ts are run. holding cost is reduced. The point is to understand the logic and know where to apply it. The effe t on order size resulting from reducing setup costs is shown in Exhibit 16.9.When the setup cost is reduced. the total cost curve shifts from TCI to TC2• Correspondingly. the EOQ is reduced from EOQI to EOQ2 and the minimum total cost is reduced from TCI""n to TC2mm.