You know from your prior experience that moving to lean manufacturing (or demand-based manufacturing) can generate not only profitability improvements but also improvements in asset requirements (inventory reduction). Based on this, you wanted to let the Global Supply Chain Manager and her purchasing department know about the kind of inventory savings that might be achievable.
She is already familiar with the classic EOQ formula, of
Q= v2CD / H
WhereC = cost of issuing a new purchase order or cost of a changeover in the manufacturing plant;D = demand per period; andH = carrying cost of inventory
To assess the expected level of average inventory, the formula is
Average inventory = Q / 2
where Q = EOQ from the EOQ formula.
In a traditional forecast-driven manufacturing operation, assume the following:
- Monthly sales or demand = 1,000 units
- Changeover cost = $500
- Inventory carrying cost = 30% of inventory cost
- Average cost per unit of inventory = $10
Let the Global Supply Chain Manager and her purchasing department know the following:
- In a traditional forecast driven manufacturing operation,
- What would be the EOQ?
- What would be the average inventory level in units, and in dollars?
- In a demand-based, synchronous manufacturing operation, assume C = $10, with the changeover time reductions seen in synchronous manufacturing.
- What would be the new EOQ?
- What would be the new average inventory level in units, and in dollars?
- Assuming the carrying cost of inventory is 30%, what is the dollar savings in inventory needed?
- What conclusions can you reach about the impact on the company’s overall ROI when switching to demand-based, synchronous manufacturing?