2. Economic Production Quantity
 EPQ is the quantity of a product that should be 
 manufactured in a single batch so as to minimize the 
 total cost that includes setup costs for the machines 
 and inventory holding costs.
 • Production done in batches or lots
 • Capacity to produce a part exceeds the part’s usage 
  or demand rate
 • Assumptions of EPQ are similar to EOQ except 
  orders are received incrementally during production
  –This corresponds to producing for an order with finite 
   production capacity
   Economic Production Quantity Assumptions
  • Only one item is involved
  • Annual demand is known
  • Usage rate is constant
  • Usage occurs continually
  • Production rate p is constant
  • Lead time does not vary
  • No quantity discounts
                       EPQ Profile
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    Notations
   d = daily  demand, 
   D = Annual  demand 
   p  = daily production capacity in units 
   S = set up cost
   H = Annual holding cost
   L = Lead time
   SS = Safety stock
   No. of operating days per month
           Meaning of Q* in EPQ
    • Q* here is still the “order quantity” 
      (number of units in an order), but now the 
      “order” is issued to the production 
      department of the same company.
    • Therefore, Q* is actually the production 
      batch size or lot size.
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