EOQ Lot Sizing To apply the EOQ formula, we need three inputs: the average demand rate, ; the holding cost rate, h; and the setup cost, K. Consider the valve casing assembly in Example 8.1. Suppose that the setup operation for the machinery used in this assembly operation takes two workers about three hours. The workers average $22 per hour. That translates to a setup cost of (22)(2)(3)=$132. The company uses a holding cost based on a 22 percent annual interest rate. Each valve casing assembly costs the company $141.82 in materials and value added for labor. Hence, the holding cost amounts to (141.82)(0.22)/52=$0.60 per valve casing assembly per week. The planned order release resulting from a lot-for-lot policy requires production in each week. Consider the total holding and setup cost incurred from weeks 6 through 15 when using this policy. If we adopt the convention that the holding cost is charged against the inventory each week, then the total holding cost over the 10-week horizon is zero. As there is one setup incurred each week, the total setup cost incurred over the planning horizon is (132)(10)=$1,320. This cost can be reduced significantly by producing larger amounts less often. As a "first cut" we can use the EOQ formula to determine an alternative production policy. The total of the time-phased net requirements over weeks 8 through 17 is 439 , for an average of 43.9 per week. Using =43.9,h=0.60, and K=132, the EOQ formula gives Q=h2K=0.6(2)(132)(43.9)=139. apter Eight Push and Pull Production Control Systems: MRP and JIT If we schedule the production in lot sizes of 139 while guaranteeing that all net requirements are filled, the resulting MRP calculations for the valve casing assembly are One finds the ending inventory each period from the formula inventoryEnding=inventoryBeginning+deliveriesPlannedrequirements.Net Consider the cost of using EOQ lot sizing rather than lot for lot. During periods 8 through 17 there are a total of four setups, resulting in a total setup cost of (132)(4)= $528. The most direct way to compute the holding cost is to simply accumulate the ending inventories for the 10 periods and multiply by h. The cumulative ending inventory is 97+55+23++117=653. Hence, the total holding cost incurred over the 10 periods is (0.6)(653)=$391.80. The total holding and setup cost when lot sizes are computed from the EOQ formula is $528+$391.80=$919.80. This is a considerable improvement over the cost of $1,320 obtained when using lot-for-lot production scheduling. (However, this savings does not consider the cost impact that lot sizing at this level may have upon lower levels in the product tree. It is possible, though unlikely, that in a global sense lot for lot could be more cost effective than EOQ. This point will be explored in more depth in Section 8.5.) Note that the use of the EOQ to set production quantities results in an entirely different pattern of gross requirements for the valve and slide assemblies one level down. In particular, the gross requirements for the valves are now 26. Consider the example presented in Section 8.2 of scheduling the production of the valve casing assembly. a. Suppose that the production capacity in any week is 100 valve casings. Using the algorithm presented in this section, determine the planned order release for the valve casings. b. What gross requirements schedule for the valves does the lot sizing you obtained in part (a) give? c. Suppose that the production capacity for the valves is 200 valves per week. Is the gross requirements schedule from part (b) feasible? If not, suggest a modification in the planned order release computed in part (a) that would result in a feasible gross requirements schedule for the valves