Sensitivity of the EOQ Model The EOQ model (Economic Order Quantity) is a deterministic inventory model that assumes a constant demand and a fixed order quan...
The EOQ model (Economic Order Quantity) is a deterministic inventory model that assumes a constant demand and a fixed order quantity. While the EOQ model is a good approximation for simple scenarios, its accuracy can be significantly impacted by changes in the demand or order quantity.
Factors affecting sensitivity:
Demand: A higher demand will require more EOQ units to be ordered, leading to higher inventory levels and increased sensitivity to demand fluctuations.
Order quantity: A larger order quantity will also require more EOQ units, increasing sensitivity to the order size.
Lead time: A longer lead time will give suppliers more time to adjust their inventory levels, leading to less fluctuation in inventory levels and a less sensitive EOQ model.
Safety stock: Adding safety stock reduces inventory variability but can also lead to higher EOQ levels and increased sensitivity to demand fluctuations.
Examples:
Higher demand: A sudden increase in demand will require a larger EOQ to keep inventory levels sufficient to meet the increased demand.
Large order quantity: An order placed for 100 units will have a significantly higher EOQ compared to an order for 10 units.
Long lead time: A long lead time will give the supplier more time to adjust their inventory levels, making the EOQ model less sensitive to changes in demand.
Adding safety stock: Adding 10 units of safety stock will increase the EOQ by 10 units, making the model more sensitive to demand fluctuations.
Sensitivity analysis:
Sensitivity analysis involves testing different values of the demand, order quantity, lead time, and safety stock and calculating the resulting changes in inventory levels. By analyzing the results, you can identify the factors that have the most significant impact on the EOQ model's accuracy.
Conclusion:
The EOQ model is a useful tool for understanding inventory dynamics. However, its accuracy can be significantly affected by changes in demand, order quantity, lead time, and safety stock. By understanding the factors that affect sensitivity, you can use the EOQ model to make more informed decisions about inventory management