Weaknesses of eoq formula, Business Management

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.

Posted Date: 3/1/2013 3:17:29 AM | Location : United States







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