Multi-Product Economic Order Quantity Analysis Under Minimum Inventory Valuation Constraints^*

Abstract

The economic order quantity method is examined in the context of a required minimum valuation of a multi-product inventory. Such a context may arise when inventories are pledged to secure a loan. Two cases are developed according to the contractual nature of the minimum valuation requirement, and computational procedures are provided for each case. Implicit costs and loan interest rates attributable to valuation guarantees are examined via two examples. A management tool, the "c-over-v rule", emerges as a useful concept for allocating required buffer stocks and for estimating the maximum marginal loan interest rates attributable to valuation guarantees.