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JOURNALOFOPERATIONSMANAGEMENT Vol 9, No. I, January 1990 Guidelines for Setup-Cost Reduction Programs to Achieve Zero Inventory JAMES R. FREELAND" JOHN I? LESCHKE* ELLIOTT N. WEISS* EXECUTIVE SUMMARY Historically, academics and managers have approached inventory management by assuming setup cost is constant. However, recently, particularly through the experience of the Japanese, we have seen that setup time and setup cost are by no means fixed. For example. one approach to reduce setup, SMED (single minute exchange of die) suggests setups cart be reduced from days to minutes. Furthermore, setup reduction is identified as one of the key facilitating factors for just-in-time manufacturing. In light of this development, there is an emerging stream of literature on setup reduction. This research stream generally follows the tradition of the lot-sizing literature; the optimal amount of setup reduction is determined given a total cost model and a setup cost/reduction investment function. However, a limitation of these models is that they focus on a single item and typically include only setup and inventory costs. A key insight from the literature is the counter-intuitive notion that setup reduction yields increasing marginal returns. Thus, we consider the issues faced by a manager trying to prioritize setup reductions for multiple items. As with the SMED philosophy, where the target is to reduce all setups to less than ten minutes, we do not seek to optimize the amount of setup reduction. Instead we are concerned with establishing an economical sequence for reductions. In general. we assume setup reductions are cost- justified by direct or indirect benefits. This paper is organized into six sections. The first two sections introduce the problem and review the relevant literature. The third section determines for a single item operating under the EOQ assumptions. what fraction setup must be reduced to achieve a target order quantity. The target may be zero-inventory, which is alternately defined as an EOQ of one or lot-for-lot production. A simple graph for use by managers is provided to show the relationship of target order quantity and fraction setup reduction required. In the fourth section, the implications
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