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Order Quantity Profile

Many people argue that EOQ analysis is outdated.  I argue that despite its deficiencies, an EOQ analysis should be completed as a part of any inventory strategy.  First, the analysis suggests appropriate reordering intervals for all items.  (The forecast annual demand divided by the EOQ is the optimal time between orders.)  Second, the analysis points out the importance of reducing the costs of placing purchase orders.  The lower the purchase order cost, the more economical it becomes to order in small increments and the less inventory we will have in the system.  Third, the analysis comparing actual order or run quantities with the optimal order/run quantities often reveals significant opportunities to reduce lot size inventory levels. In the example from a biotechnology manufacturer and distributor the order/run quantities are 2 to 8 times what they should be for over 1/3 of SKUs.

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