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Define the modeled costs
D is annual unit demand, K is fixed cost per order and h is holding cost per unit per year.
| Feature | Assumption |
|---|---|
| Demand | Known and constant over time |
| Orders | Fixed order cost and a continuous quantity |
| Replenishment | The simple cycle-inventory model |
| Omitted terms | Safety stock, shortages, varying purchase prices and other constraints |
Explain the opposite cost movements
A larger Q reduces the number of orders per year but increases average cycle inventory Q/2. At the unconstrained continuous optimum, the two modeled annual costs are equal. That equality belongs to this objective, not every inventory system.
Check feasible quantities separately
A supplier may require minimum quantities, pack sizes or integer units. Evaluate the relevant feasible quantities and costs instead of assuming a fractional output is an order you can place.
Add omitted risks when the task requires them
Uncertain demand and lead time can require a buffer or a different model. Lowering inventory without that context can increase shortage exposure. The basic EOQ result does not determine the entire operating policy.