What is Economic production quantity?
The economic production quantity (EPQ) is the optimal order quantity that an organisation should place with a supplier or pass through their production facilities, to minimise inventory costs, ensuring a balance point between an overstock and stock out situation, whilst leveraging the optimum manufacturing run price.
Understanding economic production quantity is important from the inventory management side of things because holding too much inventory is costly to carry and holding too little can incur stock-outs, lost sales, and perhaps in rare cases production plant shutdowns
What should I consider if applying the economical production quantity model?
When implementing the EPQ model, it is important to consider the assumptions that underpin its use:
- No safety stock is needed because demand is known and constant.
- Lead time is known and constant.
- No quantity discounts are available.
- Ordering costs are constant.
- All demand is satisfied and there are no shortages.
- Inventory is delivered in a single shipment.
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