EOQ is a Cost World metric. The purpose of the method is to find the minimum cost of buying and holding inventory. It does not take into consideration the impact inventory has on Throughput (and sales). Too low (and the wrong) inventory will almost certainly cause a company to lose sales, Throughput and profit.
The reason to minimise inventory should not be to minimise these to costs. It should be to minimise lead-times (for low inventories in a supply chain, lead-times must be low). The shorter lead-times are the smaller the bullwhip effect and the smoother demand will be on production. The smoother demand on production is, the more effective production will be in on time delivery, ensuring product availability, production capability (capacity to produce) and production cost per unit.
In the TOC World we focus on maximising Throughput which, done correctly, leads to the lowest overall cost. We focus on placing inventory in the right place in order to ensure due date and availability near 100%. We focus on minimal lead-times to minimise the bullwhip effect and thus also inventory. Because of this focus it can easily happen that TOC Throughput tactics take an organisation away from the EOQ minimum – often towards the left with more frequent re-ordering.
So, is EOQ a valuable concept? Or, is it dangerous?
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