M113 - EOQs, MOQs & saving set-ups

Introduction

This lesson discusses the concepts of Economic Order Quantities (EOQ) and Minimum Order Quantities (MOQ), and the practice of saving set-ups. It is a widely held belief in manufacturing that these concepts and practice, when used, make the manufacturing system efficient and therefore increases profitability.

This lesson explains why these beliefs are erroneous. EOQ, MOQ, and saving set-ups inflates inventories unnecessarily, elongates manufacturing lead times and causes due date performance to deteriorate. This in turn reduces profitability.

What you should do

  1. Read the learning objectives carefully.
  2. Download the handouts (see Unit Notes below).
  3. Watch the video (below) and make your own notes.
  4. Review the Unit Notes.
  5. Refer back to the learning objectives to ensure you have satisfied each one.

What you should know

At the end of this unit you should understand:

  1. What EOQ and MOQ are.
  2. What the practice of saving set-ups is.
  3. How they inflate inventories and, therefore, manufacturing lead times.
  4. How long lead times damage financial performance.

M113 - EOQs, MOQs & saving set-ups

Unit notes

1. Click here to download the unit handouts.

2. The Economic Order Quantity concept was created by Ford W Harris in the early 20th century.

3. The idea claims that there is an ideal batch size to produce that optimises the trade off between the cost of setting up a machine and total carrying cost.

4. However, there are no real costs to setting up a machine. No money leaves the company. There may be an opportunity cost if the set-up is performed on a real bottleneck, but real bottlenecks are very rare. Even so, no money leaves the company.

5. We can only claim something is a cost if money actually leaves the company.

6. How does this work in a plant? In manufacturing plants, operators try to save set-ups by grouping orders that share the same set-up for production together. This inevitably results in orders being pulled out of sequence - the sequence determined by market demand. This means orders that are less urgent are being processed before orders that are more urgent. This results in orders being less likely to hit their due dates for delivery.

7. Missing due dates damages our reputation with customers, ties up cash in inventory for longer, etc.

8. MOQ are just an extension of EOQ, where we try to impose our EOQ on customers.

9. EOQ and MOQ elongate the manufacturing lead time and therefore negatively impact our financial performance. The goal is to make more money now and in the future. Actions that move us towards the goal are productive. Any action that takes us further away from our goal cannot be defined as productive.

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