An EOQ-Based Lot Sizing Model with Working Capital Requirements Financing Cost

Abstract

In time of financial crisis, bank loans are often extremely difficult to obtain for many companies. However, companies always need free cash flow to efficiently react against to any uncertainty. This work demonstrates the impact of financial consequences on operational decisions in the single-product, single-level, infinite capacity EOQ model. We propose an operation-related working capital requirement (WCR) model in a tactical planning context. The classic EOQ model is extended by integrating the WCR financing cost with a cost minimization objective and deriving its analytical solution. Compared with the optimal policy of the classic EOQ model, our approach leads to a new policy with a smaller production lot size due to the new cost trade-offs. Furthermore, an analytical analysis with a classic EOQ-based formula that considers the cost of capital demonstrates the sensitivity of approximating financial costs compared to our exact approach. Finally, sensitivity analysis and numerical examples are also provides.

Supported by the Fundamental Research Funds for the Central Universities.