Question

As you read about lean operations, you are discovering that many proponents of lean operations argue that a firm should not rely on an order quantity model (such as the EOQ), but should instead strive to reduce the order size to 1. Use the EOQ formula to discuss what variables have to be changed to make it cost effective to reduce order size to 1.

Answer 1

Answer:

Based on lean operations, it argues that the firm should not rely on order quantity model like EOQ, but should strive to reduce the order size to 1. With the help of EOQ formula, following variables have to be changed to make cost effective to reduce order size to 1 as below

EOQ formula is given as below

• EOQ = Square root of [ (2 * D * S ) / (H) ], where D= Annual Demand, S= Ordering Cost, H= Inventory holding cost.
• EOQ = √ [(2*Demand * Order Cost)/(Holding cost) ]

So if we refer the formula of EOQ, we can see three variables, demand for the part, ordering cost of the organization and holding cost of the organization.

So economic order quantity model help in balancing the demand with the order cost and holding cost and brings the ordering cost and holding cost to the minimum possible for the organization so that the organization do not spend high cost on ordering process and inventory holding process.

So if we want to explore the lean process and wants to reduce the order size to 1 to have lowest cost for the organization, then we need to reduce the cost for below variables

• Ordering cost of the organization to be reduced to nil or negligible.
• Inventory holding cost of the parts need to be reduced to nil or negligible.

So one can have order quantity to 1 based on demand, if holding cost and ordering cost are not the key significant cost contributor in order management process.