Economic production quantity

The EPQ model was developed and published by E. W. Taft, a statistical engineer working at Winchester Repeating Arms Company in New Haven, Connecticut, in 1918.

Similar to the EOQ model, EPQ is a single product lot scheduling method.

EPQ only applies where the demand for a product is constant over the year and that each new order is delivered/produced incrementally when the inventory reaches zero.

We can notice from the equations above that the total ordering cost decreases as the production quantity increases.

Therefore, in order to get the optimal production quantity we need to set holding cost per year equal to ordering cost per year and solve for quantity (Q), which is the EPQ formula mentioned below.

Ordering this quantity will result in the lowest total inventory cost per year.

This figure graphs the holding cost and ordering cost per year equations. The third line is the addition of these two equations, which generates the total inventory cost per year. This graph should give a better understanding of the derivation of the optimal ordering quantity equation, i.e., the EPQ equation