Question

What are the differences between the classical EOQ inventory system and MRP? Give an example of a where you should choose one over the other and explain why.

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.

Material requirement planning refers to the technique to calculate the requirements for materials and is used for multilevel planning. It has fixed lead times and the work is loaded into buckets of infinite size.

The difference between MRP and EOQ are: -

• MRP is preferable when dependent demand exists and EOQ is preferable when the demand is independent.
• The main aim of EOQ is to maintain the amount of material at desired level at minimum cost whereas MRP system focus on meeting three objectives: to make sure material is available for production, to make sure products are available for delivery and focus on maintaining the lowest possible inventory.