Economic production quantity is a planning model and is an equation that is used for determining the lowest possible inventory costs. This includes the fee for acquisition and maintenance of materials. A company will typically use the results of this equation as a guide when ordering a product or materials for production. It is often referred to as the EPQ model.
In order for economic production quantity to be accurate, several assumptions must be met. These include the requirements that there must be one product entered into the equation and that costs of and demand for the product will be steady. It is also important to know the exact cost of preparing for production and arranging storage of the resulting item.
The economic production quantity model can also help a company to determine when more inventory should be ordered. This figure is usually based on the amount of remaining material. The level to which product inventory can drop before the company should order depends upon how much product needs to or can be on hand. Factors such as perishability, availability, and rate of production may all be considered.
Economic production quantity is also typically calculated so that a company can determine the cost of storing inventory. The model can help to calculate how much space is needed for storage. It can also determine the cost of maintaining inventory.
Another purpose of the economic production quantity model is to determine the impact of product shortages. This equation primarily takes into consideration the losses that would be incurred during periods when demand is higher than supply. It is one of the most difficult elements of the process to project accurately as there are so many unpredictable factors.
In order to accurately manage inventory as a whole, the equation must take the characteristics of each product into consideration. It is difficult to use the model accurately with multiple products because of multiple variances among different items that can change the cost of production and storage. Items can also be weighted for importance. This can include factors such as the profitability of a certain item, the number of sales, or the lower cost of producing the product.
An economic production quantity model may also include allowances for quantity discounts. This is particularly common with larger companies. It can be difficult to make an accurate calculation if the discount is a limited offer or if the amount changes.