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Sensitivity of the EOQ Model to Parameter Estimates

Author

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  • Gregory Dobson

    (University of Rochester, Rochester, New York)

Abstract

The Economic Order Quantity (EOQ) model for independent demand is well known to be somewhat insensitive to the choice of order quantity. The cost goes up as the square root of the ratio of the actual order quantity to that of the optimal order quantity. The question arises as to how sensitive this cost is to parameter estimates. This paper extends the work by T. J. Lowe and L. B. Schwarz to show that under minimax and expected value criteria, the sensitivity of the cost to the parameters of the model grows as the fourth root of the uncertainty in the values of the parameters. Furthermore, for a wide class of distributions, including the beta (hence, uniform) and the gamma (hence, exponentials), a tight bound exists for the expected error.

Suggested Citation

  • Gregory Dobson, 1988. "Sensitivity of the EOQ Model to Parameter Estimates," Operations Research, INFORMS, vol. 36(4), pages 570-574, August.
    • Handle: RePEc:inm:oropre:v:36:y:1988:i:4:p:570-574
    DOI: 10.1287/opre.36.4.570
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    Cited by:

    1. Venegas, Bárbara B. & Ventura, José A., 2018. "A two-stage supply chain coordination mechanism considering price sensitive demand and quantity discounts," European Journal of Operational Research, Elsevier, vol. 264(2), pages 524-533.
    2. Khanra, Avijit & Soman, Chetan, 2013. "Sensitivity Analysis of the Newsboy Model," IIMA Working Papers WP2013-09-03, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Gérard P. Cachon, 2014. "Retail Store Density and the Cost of Greenhouse Gas Emissions," Management Science, INFORMS, vol. 60(8), pages 1907-1925, August.
    4. Joseph Geunes & Zuo‐Jun Shen & H. Edwin Romeijn, 2004. "Economic ordering decisions with market choice flexibility," Naval Research Logistics (NRL), John Wiley & Sons, vol. 51(1), pages 117-136, February.
    5. Borgonovo, E., 2010. "Sensitivity analysis with finite changes: An application to modified EOQ models," European Journal of Operational Research, Elsevier, vol. 200(1), pages 127-138, January.
    6. Rabta, Boualem, 2017. "Sensitivity analysis in inventory models by means of ergodicity coefficients," International Journal of Production Economics, Elsevier, vol. 188(C), pages 63-71.
    7. Hojati, Mehran, 2004. "Bridging the gap between probabilistic and fuzzy-parameter EOQ models," International Journal of Production Economics, Elsevier, vol. 91(3), pages 215-221, October.
    8. Gérard P. Cachon & A. Gürhan Kök, 2007. "Implementation of the Newsvendor Model with Clearance Pricing: How to (and How Not to) Estimate a Salvage Value," Manufacturing & Service Operations Management, INFORMS, vol. 9(3), pages 276-290, October.
    9. J. Puerto & F.R. Fernández, 1998. "Pareto‐optimality in classical inventory problems," Naval Research Logistics (NRL), John Wiley & Sons, vol. 45(1), pages 83-98, February.
    10. Geoffrey A. Chua & Yan Liu, 2019. "Sensitivity analysis on responsive pricing and production under imperfect demand updating," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(7), pages 529-546, October.

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