OMG OMG 402402LAB 4HP Video

EOQ

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

HP Video

• What can you say about such an award-winning performance?

• As illustrated in The Goal, idle hands are not necessarily the competitor’s tool

• Notice the implementation of the “buffer” of size one between each station.– Simple, clearly identified to be empty or full,

no expensive reengineering needed

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

Problem #1: Basic EOQ

• Straightforward application of the EOQ problem(A) Calculate the optimal batch size

-- EOQ Formula:

(B) Figure out the total annual cost from using this batch size

-- Total cost =

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

Problem #2: EOQ with Discounts

• Problem Setup: Supplier will offer a 10% discount for orders of 100 gallons or more

• Questions to ask:– Is it better to increase our order size to take

advantage of the price discount? – How do you determine “better?”– If we do increase the size of our orders, by how

much?

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

EOQ with Discounts

• Step 1: What if you could just get the better price all the time?– Calculate the EOQ using the New and

Improved cost per unit

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

EOQ with Discounts

• Step 2: Is the New and Improved EOQ greater than the discounted quantity?– For Greezy: Is it greater than 100?

• Yes: Congratulations, you have just found a way to reduce costs– implement the new EOQ and get the discount

• No: Go to Step 3

William E. Simon Graduate School of BusinessWilliam E. Simon Graduate School of Business

EOQ with Discounts

• Step 3: Just for fun, set your batch size to the minimum necessary to receive the discount.– Calculate the yearly cost of using that batch size– Compare that amount to the yearly cost under the

Old and Undiscounted EOQ batch size– Choose whichever one gives the better yearly

cost.