Answer to Question #284795 in Management for Alfredo Santini

Question

Drawing on academic concepts related to inventory management, identify and discuss the limitations of mathematical models such as EOQ and EBQ that may apply to the current shortage of semiconductors chips and why.

Answer 1

The first limitation of EOQ model is based on assumptions. It assumes a steady demand of a product and immediate availability of items to be restocked. It doesn't account for fluctuations. In the case of semiconductor chips, this assumption is responsible for their shortage. Secondly, this model has complicated mathematical calculations that disadvantage inventory managers who are not cognizant of the formulas of EOQ. This also affects semiconductor chips demand and production leading to their shortages.

The EBQ on the other side, the assumptions that orders are received all at once is relaxed and the limitations of planning for a small batch are: costs of frequent ordering and high risk of interruption of production due to small product inventory, a scenario that has affected semiconductor chips.