An operation manager of a chemical manufacturing plant must determine the lot size for a chemical that has a steady demand of 1,450 litres per day. The production rate is 6,850 litres per day, setup cost is $200, annual holding cost is $0.21 per gallon, and the plant operates 350 days per year.
a. Determine the production order quantity (POQ), the number of orders and the time between orders. What is the total annual setup cost? What is the total holding cost per year? Using an appropriately labelled diagram, graph setup cost, holding cost, and total inventory cost, and show the optimal production order quantity and the minimum total inventory cost. What is the setup time in hours, based on a $25 per hour setup labour cost?
b. Determine the duration of the active production interval, t. Determine the maximum inventory. Determine demand during the production interval.
c. As part of its new JIT program, the company has signed a long-term contract with its customers and the company will take orders electronically for the engines. The lot size (production order quantity) will drop to 20,000 litres. Determine the new setup cost per order and the number of orders (setups). What is the total annual cost of managing the inventory with the new policy? What is the setup time in hours, based on a $25 per hour setup labour cost with the new policy?