The EOQ model is characterized by several advantages. First, using the model, all stock items are reviewed periodically and as such, there is a greater possibility of obsolete items being eliminated (Lucey, 2003). Additionally, a firm might gain economies in placing orders by spreading the purchasing office load more effectively. It might also obtain larger quantity discounts when a range of stock items is ordered simultaneously from a supplier. Other than that, because orders always follow the same sequence, the firm might enjoy production economies due to the possibility of more efficient production planning and lower set up costs.
On the other hand, larger quantities are generally required because reorder quantities must account for the period between lead times and reviews. Moreover, the economic order quantity is less responsive to changes in consumption. This implies that if the rate of usage changes shortly after a review, a stock out might occur before the next review. Finally, unless demands are reasonably consistent, it is almost impossible to set appropriate periods for review.
Reference
Lucey, T., 2003. Management accounting. 5 ed. London: Continuum.
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