A New Approach for EOQ Calculation Using Modified Opportunity Cost

Abstract

Introduction: Optimal inventory levels are necessary for a firm to avoid shortage/excess of an item. Shortage of an item leads to stock out conditions which results in loss of profit. When items are correlated with each other, stock out condition of one item may result in non purchase of its associated items also which, in turn, further brings down the profit. In this paper, this loss in profit is used to modify opportunity cost of an item resulting in its modified EOQ. Method: One illustrative example has been discussed which incorporates purchase dependencies in retail multi-item inventory management. The model discussed in this research paper will be motivational for researchers and inventory managers and provides a method for incorporating correlation among items while managing inventory. Result: The EOQs of items are estimated both by using traditional method and then by using modified opportunity cost (modeled as loss profit). Results show that in frequent item set A, B, D, EOQs of all three items increased when correlation among them is considered resulting in increase in profit. Conclusion: One of the major focus areas of inventory management is to determine when and how much quantity of items needs to be ordered so that total inventory cost can be minimized and profit of a firm can be maximized. However, while calculating the true value of an item and the profit it brings to the firm, it is very essential to analyze its effect on the sale of other items. Asso-ciation rule mining provides a way to correlate items by calculating support and confidence factor. Discussion: In inventory management system, for increasing the profit of a firm, EOQs of items need to be calculated in order to avoid shortage or excess of inventory. For explaining the approach a very small database is taken consisting of only 5 items and 10 transactions therefore the increase in profit is minimal however, when this approach applies on real database consisting of thousands of items and transactions, the increase in profit will be significant.