700 words, including 1 page of calculations
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
Where C = cost of issuing a new purchase order or cost of a changeover in the manufacturing plant; D = demand per period; and H = 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:
Let the Global Supply Chain Manager and her purchasing department know the following:
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