Weaknesses of eoq formula, Business Management

Assignment Help:

Weaknesses of EOQ Formula

1. Erratic Usages : The formula we have used assume that the usage of materials is both predictable and evenly distributed. When this is not the case. The formula are useless. Different and far more complex formulae can be developed for wide swings in usage so long as these s wings can be predicted. But if usage varies unpredictably as it often does no formula will work well.

2. Faulty Basic Information : EOQ calculations are only as accurate as the order cost and carrying cost information in which the are based. It is no easy job to calculate order cost. In practice order cost varies from commodity to commodity. Carrying cost can vary with the company opportunity cost of capital.

3. Costly Calculations : It is not an easy job to estimate the cost of acquisition and cost of calculation accurately. This requires hours of work by skilled cost accountants. Actual calculation of EOQ can be time consuming even when the simple formulae for steady usage are used. More elaborate formulas are even more expensive. In many cases the cost of estimating cost of possession and acquisition and calculating EOQ exceeds the savings made by buying that quantity.

4. No Formula is a Substitute for Commonsense: It is therefore desirable to include a number of modifiers. The formula may suggest that we order six years supply based on the assumption that we will continue to require the item at the same rate for the next six years. The modifier is a maximum limit not more than one year supply or two year supply perhaps. It may suggest that we order every week and for these volumes we would adopt different ordering methods.

5. EOQ ordering Must be Tempered with Judgment : Certain corporate operating goals must be followed in managing an inventory. Sometimes the guidelines provide a conflict in ordering. Where an order strategy conflicts with an pirating goal order strategy restrictions should be developed to permit honouring the goal. EOQ restrictions might include the followings.

a. Items purchased to order and items subject to rapid product improvement will be restricted from EOQ use.

b. Shelf life items ( those goods only for a specific length of time ) should be restricted to a quantity not greater than one fourth of their age limitation.

c. Items with unusual sales will be identified with annual sales reduce by appropriate quantities prior to calculating EOQ .

d. Critical supply items ( those having most effect on customer service) will be ordered in greater than normal quantities. The time of supply of quantities selected will over ride EOQ.


Related Discussions:- Weaknesses of eoq formula

Strengths and weaknesses of the existing system, The system analyst must un...

The system analyst must understand the existing problems and strengths and weaknesses of the existing system. Other activities comprise identifying the overall implications and ben

Analysis Exercises, Identify and explore NetSuite’s components that relate ...

Identify and explore NetSuite’s components that relate to your business major

What is job evaluation, What is Job Evaluation? Definition of Job Eva...

What is Job Evaluation? Definition of Job Evaluation: It is a systematic process of evaluating various jobs of an organization. Depending on the features and needs of a j

Define the terms globalization and informatisation, QUESTION 1 (a) Defi...

QUESTION 1 (a) Define the terms globalization and informatisation. (b) Critically discuss how is globalization and informatisation impacting upon intercultural communication

Problem based on decision trees allow, Decision trees permits: The ...

Decision trees permits: The user to gain a wide idea of possible outcomes of the project/decision, i.e. in this case the selection of two locations Easier understandin

Game theory useful in developing competitive strategy?, ? A) Game theory em...

? A) Game theory emphasize short-term strategy to be employed in competitive strategies rather than a long-term strategy. ? B) Game theory is about thinking how competitors will

Concept of leadership and management, Understand the concept of leadership ...

Understand the concept of leadership and management, and demonstrate sound knowledge and understanding of the concepts, theories and disciplines which underpin business and managem

Data collection and analysis, Data Collection and Analysis The backbon...

Data Collection and Analysis The backbone of this research is to establish and sustain a clear link between conceptual framework and empirical analysis. The main importance of

Enumerate the benefits that e-auctions bring to e-auctioneer, QUESTION 1 ...

QUESTION 1 (a) Explain the term e-procurement and asses the pros and cons of e-procurement. (b) What are the challenges that may be faced in implementing e-procurement in th

Describe the extranet, QUESTION Every big, medium or even small company...

QUESTION Every big, medium or even small company networks should pay the highest attention to the development of their company networks (intranets and extranets connected to th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd