Question 7 (Viktor): EOQ model
The new product line, performance plastics, has to be produced in high volumes. This because the product is 100% the amount that the customer wants. In comparison with the masterbatches, which were only 1% of the volume asked by the customer, this is a significant increase in production capacity. Thus a well defined production planning system is necessary. Nowadays the most important product of performance plastics applies a kanban pull system. This is possible due to stable demand and short lead times. The problem here is the reorder quantity per kanban card, which is 8 tons for the highest-volume product. A key model to tackle this problem is EOQ (economic order quantity).
The EOQ model is a classic production …show more content…
This is 500 000 KG per year, for applicability of the model we assume this as a fixed rate. But in the case they mention a growth of this new product line. What leads in a growing demand. This would make this assumption plausible, we can adjust this model and incorporate safety stock, but growth rates aren’t provided.
Constant lead time: There is no data given in the Annex concerning lead times or manufacturing times. This assumption is needed to calculate when to reorder because we need to know how long it’ll take to produce or order a certain batch.
The item is replenished in lots or batches, either by purchasing or manufacturing, and is not produced continuously: The characteristics of this case are in line with this assumption.
Item/production cost is fixed: The cost of the product isn’t varying, so we can calculate the cost per order or quantity produced. For this case this is €2.5 / …show more content…
Fixed ordering cost can be seen as the fixed cost accounted when producing, these are obtained by costs due to changeovers. We have the following information: 46min changeover time, 1 employe costs €35/h, €90 material lost per changeover, costs of production line €70/h.
We can determine the total cost per changeover: (35/60 + 70/60)*46 + 90 = €170.5
Fixed holding cost: A key factor why we shouldn’t produce or order a too big lot size are holding costs. Holding cost can simply be the cost of warehouse storage. Moreover, the time value of money can be seen as a holding cost. In example if we order a huge lot, we can’t invest the money used for this lot, this is a loss in potential investment income. Companies often use there WACC (weighted average cost of capital) as this number. The holding cost is €10 / 1000KG per month (= 0.12/KG per year) and the WACC is 8.5% (= 0.2125/KG per year).
Orders or production are independent: This assumption is made to make sure there are no extra advantages of producing or ordering bigger lot-sizes. In real life this is a normal practice, i.e. discounts on big orders, or economies of scale for big batches. These factors will lead to a more complex EOQ model. But for this calculation we use the basic
The new product line, performance plastics, has to be produced in high volumes. This because the product is 100% the amount that the customer wants. In comparison with the masterbatches, which were only 1% of the volume asked by the customer, this is a significant increase in production capacity. Thus a well defined production planning system is necessary. Nowadays the most important product of performance plastics applies a kanban pull system. This is possible due to stable demand and short lead times. The problem here is the reorder quantity per kanban card, which is 8 tons for the highest-volume product. A key model to tackle this problem is EOQ (economic order quantity).
The EOQ model is a classic production …show more content…
This is 500 000 KG per year, for applicability of the model we assume this as a fixed rate. But in the case they mention a growth of this new product line. What leads in a growing demand. This would make this assumption plausible, we can adjust this model and incorporate safety stock, but growth rates aren’t provided.
Constant lead time: There is no data given in the Annex concerning lead times or manufacturing times. This assumption is needed to calculate when to reorder because we need to know how long it’ll take to produce or order a certain batch.
The item is replenished in lots or batches, either by purchasing or manufacturing, and is not produced continuously: The characteristics of this case are in line with this assumption.
Item/production cost is fixed: The cost of the product isn’t varying, so we can calculate the cost per order or quantity produced. For this case this is €2.5 / …show more content…
Fixed ordering cost can be seen as the fixed cost accounted when producing, these are obtained by costs due to changeovers. We have the following information: 46min changeover time, 1 employe costs €35/h, €90 material lost per changeover, costs of production line €70/h.
We can determine the total cost per changeover: (35/60 + 70/60)*46 + 90 = €170.5
Fixed holding cost: A key factor why we shouldn’t produce or order a too big lot size are holding costs. Holding cost can simply be the cost of warehouse storage. Moreover, the time value of money can be seen as a holding cost. In example if we order a huge lot, we can’t invest the money used for this lot, this is a loss in potential investment income. Companies often use there WACC (weighted average cost of capital) as this number. The holding cost is €10 / 1000KG per month (= 0.12/KG per year) and the WACC is 8.5% (= 0.2125/KG per year).
Orders or production are independent: This assumption is made to make sure there are no extra advantages of producing or ordering bigger lot-sizes. In real life this is a normal practice, i.e. discounts on big orders, or economies of scale for big batches. These factors will lead to a more complex EOQ model. But for this calculation we use the basic