What is economic production quantity model?

The economic production quantity (EPQ) model is a mathematical model used in production and inventory management to determine the optimal production quantity that minimizes inventory costs while considering setup costs, holding costs, and production costs. It is similar to the economic order quantity (EOQ) model but is used for production rather than ordering of inventory.

The EPQ model assumes that there is a constant demand for the product over time, and that there is a fixed setup cost incurred each time production is started, as well as a holding cost for inventory that is proportional to the amount held. The objective is to find the production quantity that minimizes the sum of the setup cost and the holding cost.

The formula for the EPQ is: EPQ = √[ (2DS)/H ] where D is the annual demand, S is the setup cost, and H is the holding cost per unit per year.

The EPQ model has its limitations as it does not take into account material and labor costs, variations in demand, and other production constraints. Therefore, it should be used in conjunction with other models and approaches for effective inventory and production management.