Economic Production Quantity (EPQ)
This article covers meaning & importance of Economic Production Quantity (EPQ) from operations perspective.
What is Economic Production Quantity (EPQ)?
Economic production quantity (EPQ) is the quantity of a product that should be manufactured in a single batch so as to minimize the total cost that includes setup costs for the machines and inventory holding costs.
Importance of Economic Production Quantity (EPQ)
EPQ model looks at the economic order quantity (EOQ) model and acts as an extension for the same. In EPQ model, it is assumed that the production of raw materials or parts are going to take place within the manufacturing unit itself by the company. On the other hand, the EOQ model assumes that the parts are outsourced but would be available for production as soon as the order is placed for manufacturing.
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Formula for Economic Production Quantity (EPQ)
The formula for EPQ can be highlighted as below:
EPQ = √(2xDx O/ H(1-x))
where,
x = D/P where P= Production rate
D = Annual demand in units of a product
O = Ordering cost per order
H = Holding cost per unit of the product
With increasing batch production quantity, the number of batches to be produced in the year decreases and thus the setup cost decreases but at the same time the inventory holding cost goes on increasing. At the EPQ value, the total cost comprising of both these costs is at its minimum value.
Hence, this concludes the definition of Economic Production Quantity (EPQ) along with its overview.
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