Efficient & unproductive

Part 2 - EOQs, MOQs & saving set-ups

Ever wondered why saving set-ups doesn't translate into bottom-line results?

It's conventional manufacturing wisdom that producing to economic order quantities and saving set-ups is efficient and makes you profitable. This video explains why that belief is not only wrong, but also makes you unproductive and loses you money.

You will learn -

  1. What the Economic Order Quantity concept is.
  2. Why EOQs and MOQs make no sense in a modern manufacturing environment.
  3. Why saving set-ups increases manufacturing lead times, reduces due date performance and loses you money.

Part 2 - EOQs, MOQs & saving set-ups

Unit notes

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

2. 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.

3. 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.

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

5. 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.

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

7. MOQs are just an extension of EOQs, where we try to impose our EOQs on customers.

8. EOQs and MOQs 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.


Tutor - Alex Dinham

Running time approx. 31 minutes

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