Economic order quantity and storage size — Some considerations

Abstract

Despite the emphasis on and success of Just-in-Time (JIT), and the drive towards zero inventories implying lot sizes of one, companies for the time being still have to deal with lot sizes. The determination of optimum order quantities revolves around the inventory holding costs, and set up costs. In the literature on economic order quantities, holding costs are considered as variable costs only. However, decisions regarding storage capacity (for holding raw materials, semi-finished or finished items) have also to be made and these capacity decisions introduce a fixed cost component to the holding costs. The present paper develops a model which incorporates a fixed cost component in the holding costs, presents the determination of the optimum EOQ and the consequent storage size requirement.