OPIM101 - Spring 2012 - Lecture 4

# OPIM101 - Spring 2012 - Lecture 4 - Process Interruptions:...

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Slide 1 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Process Interruptions: Setup Costs, Buffer or Suffer, Quality, Variability Lecture 4 February 7, 2012

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Slide 2 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Setup Costs EOQ Formula Quantity Discounts Converting Setup Times to Setup Costs
Slide 3 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Ordering handle caps for the Xootr § Data: \$0.85 = cost to Nova Cruz to purchase each handle cap from its supplier in Taiwan. \$300 = customs fee for each shipment, independent of the amount ordered. 700 = demand for handle caps per week. u Note, each “handle cap” is actually a pair, so one is needed per Xootr. 40% = Nova Cruz’s annual inventory holding cost. § Question: How many handle caps should they order each time they order from their supplier?

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Slide 4 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 The inventory “saw-tooth” pattern Inventory Time Q R Q/R Shipment arrives Shipment arrives § Assume we can time when the shipments arrive so that they arrive when we have zero inventory. § Q = Quantity in each order (what we need to choose) § R = Flow Rate of demand (700 per week) § Q / R = Time between shipments
Slide 5 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Costs § Purchase costs: \$0.85 per unit x 700 per week = \$595 per week Q cannot influence our weekly purchase cost! § h = Inventory holding cost per unit time: 40% annual holding cost, so … 0.4 x \$0.85 = \$0.34 = cost to hold a unit for one year… h = \$0.34 / 52 = \$0.006538 = cost to hold a unit for one week. Average inventory = Q / 2 Average inventory cost per unit time = h x Q / 2 § K = Setup cost: This is the cost per order and it is independent of the amount ordered. K = \$300 Q / R = time between orders, so … Setup cost per unit time = K / ( Q / R )

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Slide 6 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Objective and solution § Objective: Choose Q to minimize the average (setup and holding) cost per unit time, C(Q) : § Solution: Order the Economic Order Quantity (EOQ) = Q * Q h Q R K C(Q) × + × = 2 1 8015 006538 . 0 700 300 2 = × × = × × = h R K 2 Q * 0 20 40 60 80 100 120 2000 4000 6000 8000 10000 12000 14000 Order Quantity C(Q) = cost per week C(Q) Setup costs Holding costs Costs for Xootr handle caps
Slide 7 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 EOQ and economies of scale § Setup and inventory holding costs per unit: § Per unit costs decrease in the demand volume for an item: ( 29 R h K 2 R Q C * × × = Flow Rate, R (units / week) EOQ, Q * Per-unit ordering and inventory cost, C(Q*) / R (\$ / unit) Ordering and Inventory Costs as a % of Total Procurement Costs 300 5247 0.11 13.5% 500 6774 0.09 10.4% 700 8015 0.07 8.8% 900 9088 0.07 7.8% 1100 10047 0.06 7.0%

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Slide 8 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4 Two different shopping experiences
Slide 9 OPIM 101, Spring 12, Profs Cachon/Savin, Lecture #4

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## This note was uploaded on 04/04/2012 for the course OPIM 101 taught by Professor Lee during the Spring '08 term at UPenn.

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OPIM101 - Spring 2012 - Lecture 4 - Process Interruptions:...

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