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How the Issues of Safety Stock Can Be Incorporated in Economic Order Quantity and Reorder Point

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The earliest article that had mentioned the Economic Order Quantity model was that of Ford Whitman Harris in 1913 (Erlenkotter, 1990). Harris was an engineer with Westinghouse, and although he had only finished formal education until high school, he was a self-taught inventor who held 50 patents and wrote 70 articles (Roach, 2005, p. 5). The EOQ is a formidable model that allows for management to determine the quantities of supplies or material to order so as to minimize the cost or inventory ordering and maintenance to the company. The EOQ formula is founded on the following assumptions (Roach, 2005, p.

5): (1) Demand is continuous and constant (i. e., the rate of depletion of inventory is constant. (2) The process continues infinitely. (3) There are no quantity constraints (on order quantity or storage capacity). (4) Replenishment is instantaneous. (5) No shortages are allowed. (6) Costs are time and quantity invariant. It is apparent that most, if not all, of these assumptions taken in their strictest sense, is unrealistic. For instance, demand for certain supplies do not continue indefinitely nor are they constant, because of changes in product design to suit changing market fashions and tastes, technological innovations that render some supplies irrelevant or obsolete, and mere seasonality of demand.

Obviously, there are order quantity and storage capacity limitations in terms of available storage space, otherwise, a new warehouse or stockroom would have to be provided for an additional cost. Of the five assumptions mentioned, the last three have been relaxed to allow for variations in the model that would more closely approximate real-world situations. In particular, the assumptions on replenishment and shortages have been addressed by the safety stock variant of the EOQ.

This version allows for the reorder point to occur earlier than the basic EOQ model would allow so that the lead time for orders is reckoned not from the point of depletion, but from a point designated as the safety stock.  

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