How do you evaluate the trade-offs between holding costs and ordering costs in EOQ and reorder point models?

3 Trade-offs between Models

Both EOQ and ROP models aim to reduce the total inventory cost, but they have different strengths and limitations. The EOQ model is simpler and easier to use, but it does not account for uncertainty in demand or supply. The ROP model is more realistic and flexible, but it requires more data and analysis. The EOQ model is more suitable for products with stable and predictable demand, while the ROP model is more suitable for products with variable and uncertain demand. The EOQ model is more sensitive to changes in fixed cost per order, while the ROP model is more sensitive to changes in safety stock.

4 How to Evaluate Trade-offs

To evaluate the trade-offs between holding costs and ordering costs in EOQ and ROP models, you need to consider several factors, such as the nature of your products, the reliability of your suppliers, the accuracy of your forecasts, and the availability of your resources. You can use a spreadsheet or a software tool to compare the total inventory cost under different scenarios and parameters. You can also use sensitivity analysis to measure how changes in one factor affect the optimal order quantity or reorder point. You can also use simulation techniques to test the performance of your models under various conditions.

5 How to Improve Trade-offs

In order to improve the trade-offs between holding costs and ordering costs in EOQ and ROP models, you can implement certain strategies. This includes negotiating better terms with suppliers, improving your demand forecasting methods, reducing safety stock levels, and optimizing inventory layout and storage. Some of these approaches include lower prices, faster delivery, volume discounts, using historical data, market research, machine learning, continuous review, periodic review, service level policies, ABC analysis, FIFO method, and cross-docking.

6 How to Choose between Models

When deciding between EOQ and ROP models, it's important to consider the benefits and drawbacks of each model in relation to your specific situation. To do this, take into account criteria such as the accuracy and consistency of demand and supply data, the complexity and variability of your inventory system, and the trade-off between inventory cost and service level. Additionally, consider the trade-off between simplicity and realism. Evaluating these criteria will help you choose the model that best fits your inventory management goals and challenges.