Consider two inventory problems with identical demand, holding cost, and setup cost. In one, goods arrive instantly, but in the other goods arrive at a measurable rate. Which of these problems will have the larger optimal order quantity? Why?
What will be an ideal response?
The problem with instantaneous delivery is an EOQ problem, and its optimal order quantity is Q*. The problem with noninstantaneous delivery is a production order quantity problem, with optimal order quantity Q*p. The production order quantity problem will yield a higher order quantity than the basic model, other things equal, because the effective annual holding cost is lower in the production order quantity model. This occurs because most of the inventory arrives later (hence is not held from the beginning) compared to the EOQ environment.
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