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= 2 HOW TO FIND THE EOQ? Operations Management Flow Rate R Economic Order Quantity Q* Per unit ordering and inventory cost C(Q*)/R Ordering and inventory costs as a percentage of total procurement costs 200 4284 % 400 6058 % 600 7420 % 800 8568 % 1000 9579 % SCALE ECONOMIES OF THE EOQ Operations Management KEY POINTS FROM BATCHING ? In deciding the optimal lot size the trade off is between setup (order) cost and holding cost. ? If demand increases by a factor of 4, it is optimal to increase batch size by a factor of 2 and produce (order) twice as often. Cycle inventory (in days of demand) should decrease as demand increases. ? If lot size is to be reduced, one has to reduce fixed order cost. To reduce lot size by a factor of 2, order cost has to be reduced by a factor of 4. Operations Management Reduce the need for batches ? Setup time reduction, SMED ? Process layout Analyze Setup times and Setup costs Compute Capacity as function of batch size Compute cycle time (CT) of the rest of the process Solve for batch size: Cap(B)=1/CT Compute setup costs and inventory costs Use EOQ model or one of its variants Setup times dominate Setup costs dominate Figure .: Summary of batching Operations Management KEY TAKEAWAYS ? OPERATIONAL PERFORMANCE MEASURES: ? Flow Related: Throughput (Flow Rate), Flow Time, and Inventory ? Little’s Law: I = (TH) x (FT) ? FLOW TIME MANAGEMENT ? Managing “Critical Path” activities ? CAPACITY MANAGEMENT ? Uncovering Bottlenecks ? Bottleneck Management ? ECONOMIES OF SCALE amp。 180。 180。 2 1 Set up costs [per unit of time]= Q R K 180。 One machine is used to produce both ponents. Operations Management Batch of 12 Batch