Certified Maintenance & Reliability Professional (CMRP) Practice Exam

Which factor is NOT used in calculating Economic Order Quantity (EOQ)?

1. Annual carrying costs

2. Annual demand

3. Ordering costs

4. Supplier lead time

The correct answer is: Supplier lead time

The Economic Order Quantity (EOQ) model is a crucial tool in inventory management, designed to determine the optimal order quantity that minimizes total inventory costs, which include carrying costs and ordering costs. One of the primary components of EOQ calculation is annual demand. This represents the total quantity of units an organization expects to sell or use within a year, which directly impacts the amount of inventory needed at any time and informs the order quantity necessary to meet this demand. Annual carrying costs refer to the costs associated with holding inventory over time, such as storage costs, insurance, and depreciation. These costs influence how much inventory is optimal to hold at a time, making them a vital aspect of determining EOQ. Ordering costs, which encompass expenses related to placing orders such as shipping and handling charges, are also integral to calculating EOQ. These costs help determine how frequently orders should be placed to keep inventory levels economically manageable. In contrast, supplier lead time, while important for supply chain management, is not a factor in the EOQ formula itself. Lead time affects how quickly an order is received but does not have a direct impact on the economical calculations related to order quantity. Therefore, it does not play a role in the calculation of EOQ.