You are reconciling the EOQ formula with how your firm operates under a LEAN phi

Question

You are reconciling the EOQ formula with how your firm operates under a LEAN philosophy. Assume that S = $30 per order, H = $2 per order, and Demand is 1600 units per year. Which of the following is a viable tactic consistent with supporting your LEAN initiative and keeping the firm competitive? Work to lower H to $4 per item by reducing the workforce. 0 Work to lower S to $25 per order through more automated ordering. o Work to lower the service level (z) from 95% to 90%. Work to lower Demand to 1200 units per year. 0 Work to raise the service level (z) from 90% to 95%.

Explanation / Answer

if the ordering cost decreases to $25 from $30, it is helpful to the firm to minimize total ordering costs in the year. it is the same in the given example. if the ordering cost is $30, the total ordering cost per year will higher than if the order cost is $25.

hence, the second option is right from the given alternatives. the remaining alternatives are irrelevant to and alternative one leads to increase the total cost of the firm. the alternative four says that demand should decrease to 1200 units, which leads to lesser sales and low revenues to the firm, which is not good.

hence the right option is second one, i.e. work to lower S to $25 per order.

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