An alternative approach to computing economic run quantity

Abstract

Our primary objective is to consider an alternative approach to computing an economic run quantity (ERQ) based on profit maximization. We first develop a general profit function for a firm that includes both production and inventory costs. We then use classical optimization techniques to establish an annual production level that will maximize profit, and use this value to determine an economic run quantity. In comparison to a standard textbook example, our approach leads to a substantial increase in profit. It is also robust over a range of values for production variables. This procedure is a break from the traditional cost minimization approach and may present a more logical methodology for the teaching of inventory management techniques.

Keywords:

• Inventory
• Economic run quantity (ERQ)
• Profit maximization