3. How would the EBQ change if the set-up costs were reduced by 50 per cent, and the holding costs were re-assessed at 40 per cent, taking account of the opportunity costs of capital at TEP? Trans-European Plastics (TEP) is one of Europe’s largest manufacturers of plastic household items. Its French factory makes a range of over 500 products, which are sold to wholesalers and large retailers throughout Europe. The company dispatches orders within 24 hours of receipt using an international carrier. All customers would expect to receive their requirements in full within one week. The manufacturing operation is based on batch production, employing 24 large injection-moulding machines. Weekly production schedules are prepared by the Planning and Control office, detailing the sequence of products (moulds and colours) to be used, the quantity required for each batch, and the anticipated timing of each production run. Mould changes (set-ups) take, on an average, 3 hours, at an estimated cost of €500 per set-up.

Concerned about the declining delivery reliability, increased levels of finished goods inventory and falling productivity (apparently resulting from split-batches where only part of a planned production batch is produced to overcome immediate shortages), the CEO, Francis Lamouche, employed consultants to undertake a complete review of operations. On 2nd January, a full physical inventory check was taken. A representative sample of 20 products from the range is shown in the table.