On the Sensitivity of the EOQ to Errors in the Forecast of Demand

Abstract

The economic order quantity (EOQ) has long been used by practitioners as a rule of thumb for setting order quantities on the basis of the commonly held assumption that the EOQ is a very robust result. That is, as many authors have stated, the EOQ appears to be quite insensitive to errors in the specification of the appropriate cost parameters and forecast of demand. This paper demonstrates that the EOQ is indeed insensitive to errors in the cost parameters, but, contrary to the conventional wisdom, the EOQ can be quite sensitive to forecast errors whenever the lead time is nonzero. This important caveat is illustrated by a number of examples.