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Top1. Introduction
The business world is competitive, such that everyone is driving towards having an edge over another. Loss of customers’ goodwill is one index that could hamper the business environment and in effect, leads to a loss. One common way of losing a customer’s goodwill is to have a stock out when a customer needs an item. The customer simply gets out buying from another shop or gets a better service from another shop and may likely continue with the new-found service provider, thereby withdrawing his patronage from his erstwhile customer. The current practice of taking previous historical demands to calculate the average for the next forecasting period has caused a lot of setbacks leading to inaccurate forecasts. This in effect has caused stock out thereby leading to loss of customers’ goodwill and its attendant financial loss.
The Economic Order Quantity and Reorder Point (EOQ/ROP) models are long used models though many establishments have not really been using them. The EOQ model was first proposed in Harris (1913). The EOQ model has practical applications in illustrating the concept of cost tradeoffs as well as specific application in inventory (Roach, 2005). The following assumptions are made in using the EOQ model: (a) instantaneous delivery (b) batch ordering (c) deterministic demand (not applicable in real life) (d) replenishment is done when inventory is zero (does not happen in real life) (e) shortages are not allowed (f) all cost coefficients are known.
The relevant costs for the EOQ model are holding cost and ordering cost. The economic parameters for the model are as follows:
C = Ordering cost
T = Holding cost
D = Rate of demand
TM = Total cost per unit time
D/Q = Number of orders per month
Total cost of ordering quantity (Q):
(1)(2)At the turning point:
That is:
(3)(4)(5)(6)(7)This is the standard Economic Order Quantity (EOQ) model.
Reorder Point (ROP) is the point that triggers inventory to be reordered. It is given by the formula in Equation 8:
(8)(9)