Compare repeat-order costs before choosing a batch size

Define the bounded cost question

MIT’s basic EOQ lecture trades ordering against cycle-stock holding under restrictive assumptions.

State the repeated purchasing decision and the period over which alternatives will be compared. Identify which costs genuinely change with the decision. A purchase price that remains the same across all feasible alternatives should not be mistaken for a saving created by the chosen batch. Have finance confirm the treatment of costs that the team does not understand.

Separate the proposed planning exercise from the actual supplier agreement. Minimum quantities, payment terms, available space and delivery arrangements may rule out an otherwise attractive alternative. Obtain those constraints from their owners rather than assuming that an arithmetic result overrides them. The initial comparison should be simple enough to audit, but its exclusions must remain visible.

Explain the two cost components

Fictional annual demand is 1,200, ordering costs 30 per order, and holding costs 2 per unit-year. For a 200-unit lot, six orders cost 180; average stock 100 costs 200. Total: 380. For lots of 100, ordering costs 360 and holding costs 100: total 460. For 300, they are 120 and 300: total 420. Costs are in fictional currency units. Assume constant demand, immediate full receipt and no safety stock.

Use consistent time units and currency throughout the worksheet. Ask a second reviewer to reconstruct the first alternative before adding more rows. A copied formula can produce plausible totals even when one input is monthly and another annual. Label every input with its business meaning, not merely a cell reference.

Now trace the other alternatives using the same sequence rather than ranking them by the number of orders alone. The comparison should make clear which component improves and which worsens. Do not import a source’s worked example or imply that these invented values describe a real company. They exist to make the decision mechanism inspectable.

Check whether the preferred row is feasible

Review the lowest-cost candidate against the supplied constraints. If it cannot be accepted, compare the feasible alternatives on the same basis. Do not round the quantity casually and retain the original cost result. A permitted pack size or delivery arrangement may change the comparison enough to require another calculation.

Ask which inputs are estimates and how much confidence their owners have in them. An administrative cost may include work that will not actually disappear when orders are consolidated. A storage estimate may omit a relevant expense or count a fixed expense as though it varied with every unit. Correct the interpretation with the appropriate owner before treating a small numerical advantage as decisive.

Consider whether the simplified operating conditions fit the item. If the product is seasonal, rapidly changing or prone to materially different demand patterns, route the problem to a qualified planner rather than extending the illustration beyond its assumptions. The goal is to know when the comparison is useful, not to force every purchasing decision into one familiar formula.

Make the recommendation proportional to the evidence

Write the preferred feasible alternative, its cost difference and the assumptions that matter most. Where two options are close, explain any practical reason for favoring one without disguising that judgment as a mathematical necessity. Ease of receiving or a documented supplier constraint may matter, but it must be stated rather than hidden in an unexplained adjustment.

Keep the decision separate from approval to buy. The purchasing owner may need to review cash timing, contractual conditions and other obligations that this calculation does not settle. The worksheet should make that review easier, not appear to have completed it.

After an authorized operating trial, compare the assumed work and costs with observed evidence. Investigate why they differ before simply inserting new values into the old recommendation. Retain the earlier comparison so the team can distinguish a changed business condition from a mistaken cost definition. A useful outcome is a repeatable decision basis, even when the initially preferred batch is not ultimately selected.

Make the reasoning concrete.

A fictional distributor wants to reduce purchasing administration by placing larger routine orders. Finance asks for the complete comparison above before accepting the claim that fewer orders will save money.

The distributor sends the comparison for commercial review. It does not create an order or claim measured savings from the fictional inputs.

Take the questions into your next brief.

Use these prompts in your own notes. Nothing is submitted from this page.

1. Period

   What decision period and units are used?

2. Costs

   Which expenses genuinely change between alternatives?

3. Check

   Can another reviewer reconstruct every component?

4. Feasibility

   Which owner-supplied constraints limit the choices?

5. Decision

   What assumption could reverse the recommendation?

Watch for the wrong conclusion.

• Counting fewer transactions as the entire saving.
• Mixing monthly and annual cost inputs.
• Rounding a candidate without recalculating its consequences.

Sources & scope

Original operational reasoning and explicitly fictional numerical fixtures. Source-derived definitions and mathematical applications remain attributed. Qualified owners decide real policy and purchasing. No account changes, purchase, stock movement or deployment occurs.

• MIT: Inventory Management, Fundamental Concepts and EOQ →Teaching material · Supports: Supports the basic cost tradeoff.