The effect of capital lockup and customer trade credits on the optimal lot size - a confirmation of the EPQ

The classical economic production quantity (EPQ) formula, which is obtained by balancing set-up and carrying costs, is reconsidered in this paper. Since the cost of capital tied up in stocked items is the most important part of the carrying costs, a refined approach considering different components of the capital lockup, i.e. direct labour, material, and set-up costs, is presented. Furthermore, in addition to the intensively discussed supplier trade credit, the hitherto neglected customer trade credit is introduced into the analysis. A comparison of the resulting lot-size formula and the classical one indicates that the ongoing discussion about financial refinements of the EPQ might end up at its starting point given by Harris (Oper. Res. 38 (1990) 947-50), as the classical formula can be transformed into the new one by choosing the crucial carrying cost parameter adequately. Consequently, several alternative approximations for the carrying cost parameter in the EPQ are evaluated.