Revisiting ROQ: EOQ for Company-wide ROI Maximization

Abstract

Although attempts have been made in the past to modify the economic order quantity (EOQ) model to the maximization of return on investment (ROI), they either failed to take the whole enterprise into account, or reached the erroneous conclusion that no adaptation is required for that purpose. In this paper we develop the company-wide ROI maximizing order quantity, and show that it is bounded from above by EOQ and that it does not necessarily follow the square root of the demand level. In fact, there are conditions under which the order quantity is constant, regardless of the demand level, or even decreasing with demand. It is important to note that such a policy, if undertaken by many firms, will reduce the economic accelerator, and thus reduce the volatility of business cycles.

Keywords:

• inventory
• optimization