Operations
Manager
EOQBACK Overview
EOQ
with backorders (EOQBACK)
 Backorders
are common in inventories held for resale to customers.
The EOQ model can be modified to handle backorders by including
one more cost, the cost per unit backordered.
This cost is extremely difficult to assess.
In theory, the backorder cost should include any special
cost of handling the backorder, such as the use of premium transportation,
and any cost associated with loss of customer goodwill.
As a surrogate for the true backorder cost, most companies
use the profit per unit.
The backorder model works well for Ryan because
financing the inventory is so expensive.
It is much less expensive to incur backorders and fill them
when the EOQ arrives than it is to hold inventory.
Of course, this is a risky policy and the backorder model
must be used with caution.
The model assumes that customers are willing to wait on backorders
and are not lost to the company.
If customers are lost, then the model is inappropriate.
There are other models that account for lost customers but
they are rarely used in practice because of the risks involved. |
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