The economicproduction quantity model determines the optimal amount a retailer orcompany should order so as to minimize inventory costs. The averagefixed ordering cost and the inventory holding cost need to bebalanced so as to minimize inventory costs. The EPQ model works undercertain assumptions. First, the total order quantity is assumed to bereceived in one batch. Secondly, the receipt of orders has constantlead time. Additionally, no shortages are permitted in the orderedsupply (Heizer & Render, 2013). Lastly, the EPQ model not onlyassumes that demand is constant, but also that it is known withabsolute certainty.
Setup time refersto the total time spent by the lot on its routes while the machinesundergo setup at all work centers. For this particular product, anoptimal lot size of 100 has been obtained. The setup time isestablished at 40 minutes per batch. For the lot size to fall to 50units, a setup time decline of 20 minutes is required. Decreasing thelot size to 25 units requires a setup time decline of 30 minutes. Asetup time decline of 36 minutes would cause the lot size to fall to10 units. The figures can be obtained by applying the EPQ modelformula as shown below:
Where Q is theoptimal lot size,
D is the annualdemand,
S is the setupcost,
H is the holdingcost,
d is the dailydemand,
and p is thedaily production.
Obtaining the lotsize helps to determine the setup time using the equation:
Setup time =setup cost/hourly labor rate
Just-in-Timemanufacturing improves the quality of production, increasesutilization of machinery, and reduces inventory costs. JIT aims toeither reduce or eliminate setup time (Heizer & Render, 2013).This explains why the setup time decreases proportionally to thereduction of the lot size.
Heizer, J., & Render, B. (2013). Operations management:Sustainability and supply chain management (11th ed.). UpperSaddle River, NJ: Prentice Hall.