Final answer:
The economic order quantity (EOQ) model assumes constant and known demand, constant and known lead time, no stockouts or backorders, and constant costs. However, these assumptions may not always hold true in the real world.
Step-by-step explanation:
The economic order quantity (EOQ) model is a tool used for inventory management to determine the optimal order size that minimizes the total cost of holding inventory and ordering inventory. However, there are several assumptions inherent in using this model:
- Demand is constant and known. The model assumes that the demand for the product is constant over a specific time period and can be accurately predicted. This assumption may not hold true in reality, as demand tends to fluctuate.
- Lead time is constant and known. The model assumes that the lead time, which is the time required to receive an order after it is placed, is constant and can be accurately estimated. In reality, lead time can vary due to factors such as supplier delays or transportation issues.
- No stockouts or backorders. The model assumes that there will be no stockouts or backorders, meaning that inventory will always be available when needed. This assumption may not be valid in real-world situations, as unforeseen circumstances or high demand can lead to stockouts or backorders.
- Costs are constant. The model assumes that the costs related to inventory, such as holding costs and ordering costs, are constant over time and can be accurately estimated. In practice, these costs can vary due to factors such as changes in interest rates or fluctuations in supply chain costs.