Question

What impact does reducing setup time have on the Economic Order Quantity? For full credit you must submit at least 5 separate postings. Points will be awarded for quality content, specific references, thorough answers to the question, and professional business writing style. Minimum of 50 words per posting. At least 2 of your 5 postings must be comments on other writers' postings. Your postings may address any number of the topics listed below for this forum.

Answer 1

The formula for Economic order quantity is - EOQ = sqrt (2DS /H) where D is annual demand, S is setup time and H is holding cost. As we can see EOQ is a direct function of sqrt (S), when S decreases the EOQ decreases. The decrease in setup cost decreases the cost per order and encourages firms to place more and smaller orders, and thus decreases the EOQ.

Example = D = 4900 , S = 49 , H = 1

EOQ = sqrt(2*D*S/H) = sqrt(2*4900*49/1) = 693

Let's assume S drops to 36  D = 4900 , S = 36 , H = 1

EOQ = sqrt(2*4900*36/1) = 594 (Decreases)

Now the number of orders is D / EOQ , when EOQ decreases it means we order EOQ quantity more frequently.