Error bounds for EOQ

Abstract

In this article we explore the properties of the discounted total cost function for the economic order quantity. We show that it is convex. Furthermore, it is shown that the classical economic order quantity (based on Wilson's formula) is not less than the true optimum value based on discounting. Bounds for the discounted reorder interval (or order quantity) based on average cost analysis are also provided. Furthermore, we analytically show that larger the ratio of noncapital-related holding charges to the total holding charges, the more adverse is the effect on the accuracy of the average cost analysis.