Manufacturing and Economic Order Quantity

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FabQual Ltd.
(This case appears in the textbook on pages 463-464 of the second edition and page 464 of the third edition. I have changed the British £ sign to the U.S. $ sign on the monetary data. You can use U.S. $ for all monetary answers.) FabQual Ltd. Manufactures parts and subassemblies for a number of small-volume manufacturers of specialized construction equipment, including bulldozers, graders, and cement mixers. FabQual also manufactures and distributes spare parts. The company has made a specialty of providing spare parts for equipment no longer in production; this includes wear parts that are no longer in production for any OEM. The Materials Management Group (MMG) orders parts – both for delivery to a customer’s production line and for spares – from the Fabrication Department. Spares are stocked in a Finished Goods Store. FabQual’s part number 650810/ss/R9/o is a wear part made only for spares demand. It has had demand averaging 300 units per week for more than a year, and this level of demand is expected to persist for at least 4 more years. The standard deviation of weekly demand is 50 units. (You can ignore this standard deviation information. You will not need to work with it for the questions I have asked.) The MMG has been ordering 1300 units monthly of part number 650810/ss/R9/o from the Fabrication Department to meet the forecast annual demand of 15,600 units. The order is placed in the first week of each month. In order to provide Fabrication with scheduling flexibility, as well as to help with planning raw material requirements, a 3-week manufacturing lead time is allowed for parts. In the Fabrication Department, 2 hours is now allowed for each setup for a run of part number 650810/ss/R9/o. This time includes strip-down of the previous setup; delivery of raw materials, drawings, tools and fixtures, etc; and buildup of the new setup. The 2-hour setup time is a recent improvement over the previous 4 hours, as the result of setup reduction...
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