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EOQ (Economic Order Quantities) - Solution For Parts Manufacturing Nightmare?

J

jmpugh

#1
Hello! The company I work for uses our machine shop to produce parts we use in our product.

Our current system is absolutely horrible and goes by the name "Hot List". Whenever a part is needed, it gets added to the hot list which gives it priority. The problem is the hot list has been completely over-run with 500 different parts and we are not meeting our shipment dates because we do not have the parts necessary to fulfill the order. There really isn't a priority when that many parts are on a list!

I am doing some number crunching to calculate the economic order quantities for each of the parts that repeatedly appear on the hot list. Right now, whenever we put a part on the hotlist, we only make enough to fulfill our current orders, so the part ends up back on the hot list in a month.

I'm going to try and convince my boss that we need to hold a 6 month supply of the parts that keep coming up on the hot list because it's costing us at least 100 bucks to make 10 parts that cost 2 dollars. And we are doing this every few weeks because we don't have any in inventory.

What are some of the pitfalls here? They don't like holding inventory (and who does) but it is my feeling that we just can't make everything on such short notice.

I just wanted to get some opinions here. Is EOQ the best approach right now? I'm looking for some advice on the best way to implement such a system. Thanks everyone for their time and input!


-- Jason
 
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BradM

Staff member
Admin
#2
Well, hello there Jason! Welcome to the Cove!

I will assume you have familiarized yourself with the basics of EOQ.

The basic EOQ is simple to calculate, but also, has many assumptions which must be figured into the picture (will all hold for you?).

The fundamental assumption is you are maximizing order quantities, s.t. order/inventory costs. You need to have decent estimations of both. For inventory costs, you should have some estimator for what it will cost to store this.

Yes, it is expensive to order these parts, but if your square footage/storage space is at a premium/ unheard of, the order costs will still be lower than the inventory costs, thus keeping the order size small and more frequent.

Now... you might can increase the number of runs, so you don't run out as much. Also, you might can get your runs in with another customer, where you don't run into so much setup charges. Have you consulted with your supplier about optimizing their batch scheduling? What about them storing some of your parts?

I think your reasoning is sound, but the numbers will need to prove it.
 
W

wmarhel

#3
EOQ has little too do with the inability of your supplier to provide materials, which is really the crux of the problem. It is really focused on balancing the various costs to determine what quantity makes the most sense financially.

Have you considered that burdening the supplier with a six month production of a particular part, with the goal being that you never out of that one particular, will cause delays with other purchased items. If there is a capacity now, and they are finding it hard to deliver five part numbers at 100 pieces each, what do you think the result will be if you dump a 600 piece order on that at one time.....and for only one part number at that.

It sounds to me that you need to have a sit down conversation with your supplier and their appropriate people to determine where the problem rests. Is it possible that you are exceeding their available capacity, or perhaps you are placing orders with required due dates inside of their typical lead time.

I really don't EOQ will help you in this situation. I would look through this forum at techniques such as set-up reduction, single-piece flow or lean manufacturing in general. But you really need to understand what is going in the supplier's facility in order to make some better determinations. It may be time to find a secondary source, either as an additional supplier or as a completely new one.

Wayne
 
J

jmpugh

#4
Thank you so much for taking the time to reply Brad and Wayne!

I think it should be stressed that alot of these parts we produce in house so at least we can work on improving the process of us making parts. We do also have a problem with getting the parts we fab out, but that problem is out of my control. I'm just trying to get our in-house parts problems fixed.

I agree with the issue of us making hundreds of parts is just going to put us further behind schedule. We moved a few product lines out and downsized about 30% so we have quite a bit of empty space we could use for inventory.

I still think we simply HAVE to have some inventory, but the question is how to best build it? I know it would not be wise to run a 6 months supply at once. I think maybe if we ran say, 3 times the amount we needed it would allow us to slowly build up our inventory to where we need it. That's where I was thinking the EOQ came in.

Since the whole system is a complete train wreck right now, I'm just a bit baffled where to start. I actually have a degree in industrial engineering but ended up working as an electrical engineer and never ever got to apply anything IE related until finally the company said, "You were an IE, right? We are in trouble ..."
 

BradM

Staff member
Admin
#5
Well.. don't feel bad. Life is considerably more complex than you learned in school, anyway!:tg:

OK, if these are your internal parts, why are you calculating run costs/order costs? Is that changeover costs?

If that is the case, you may need to broaden your horizons. for example, you may need to optimize the scheduling models for your equipment. They may not be efficient, and not laid out properly.

Do you have any idea of the inventory costs? For any type of analysis, model, etc., you will have to know that.

Oh.. I hate to utter the phrase, but within JIT philosophy, you won't need to carry much inventory. Now, I do agree with you that no inventory is very difficult; and if you have some space, you can probably justify the cost of keeping some.

You can use models based on inventory units/ safety stock, and negate the cost model.

Another thing you can do is develop an annual schedule, laid out by months. Make estimations of demand (like weekly/monthly) and how long the wait is for production, and figure in the other equipment uses. Project scheduler might be good for this one.
 
D

duecesevenOS - 2009

#6
Just realizing that what you really need is an understanding of inventory within your process.

There are basically three different types of inventory:

Stores - This is how much inventory the customer of a process will take when they decide to take it. If your customer(s) are only going to take one part every time they take parts, then you need a store of one all of the time. If they take a "lot" of 1000 parts every time they take parts, then your store needs to hold 1000 parts.

At this point you ask yourself, "Is my customer consistent in how much he takes when he takes it from me? Will he take one sometimes and 4 other times?"

Buffer Stock - This inventory is used to accomodate changes in customer demand. So you set up a store to accomodate the fact that your customer will pull 100 parts every time he pulls. Then your customer tells you he should be coming by every week to grab his 100 parts so you set up your process to run 100 parts per week. If there is a chance your customer will come by early one week to pick up his one hundred and late the next, then you need buffer.

Buffer stock is needed to accomodate instability in your customer.

Safety Stock - This inventory is used to accomodate changes in your supply. If there is a chance your process will be shut down for a period of time that would result in not being able to fill your store, you create safety stock to cover the period of time you won't be able to run. Safety stock is also used in batch production.

Safety stock is needed to accomodate instability in you, the supplier.

What is great about this is that if you follow these rules, the process tells you how much inventory the process needs. With a process focus, there is no room for interpretation. If you want to lower inventories, you have to stabilize the processes.
 

Bev D

Heretical Statistician
Staff member
Super Moderator
#7
Yes - I would strongly recommend you research lean methodes inventory control
 
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