Example 12.4 illustrates why a company might invest to reduce its setup cost. It all depends on how much this investment costs, as specified (in the model) by the cost of a 10% reduction in the setup cost. Use Solver Table to see how the results change as this cost of a 10% reduction varies. You can choose the range for this cost that makes the results "interesting." Within your range, does the lower limit on setup cost ($50) ever become a binding constraint?
Example 12.4
REDUCING THE SETUP COST AT COMPSERVE
The Comp Serve Company stocks expensive laser printers. The annual demand for this product is 300 units. The cost from Comp Serve's supplier is $1000 per printer, the cost of capital is 10%, and the storage cost per printer per year is $30. Comp Serve currently incurs a setup cost of $800 per order, but it believes that by streamlining its ordering and delivery operations, it can reduce this value and thereby achieve smaller inventory levels. Specifically, Comp Serve estimates that each 10% reduction in setup cost will require a $1500 investment. However, preliminary analysis shows that reducing the setup cost below $50 is physically impossible, regardless of the amount invested. Should the company invest in setup cost reductions, and if so, how does this affect its ordering policy?
Objective To check, in the context of the basic EOQ model, whether it is cost-effective to make a one-time investment in setup cost reduction.