The Flow World

We mentioned earlier that we want to create a flow world with a river of production that flows continuously, not a series of sfreams and lakes with large dams to retain inventory. A modified EOQ equation offers added insight into the economics of tire supply chain. This is the case of the production order quantity, which is a product of tire same operations research discipline that produced the EOQ equation. The production order quantity focuses on decisions about how much to make. It differs from the EOQ equation because it takes into accoimt tire inventory demand during tire production lead-time. The production order quantity is  

The terms in the production order quantity equation are the same as those in EOQ, with two exceptions  

For very slow rafes of r relative to p, there s not much difference between the economic order quantity and the production order quantity. This is often the implicit assumption by those applying the EOQ equation, that the EOQ is the same for bo ordering and production. However, as r approaches p, the production order quantity increases toward infinity. That is, the production is continuous and never stops. So we now have a river rather than a bunch of dams and lakes. 

as the cost — and here we use incremental cost — of an individual order declines to zero, so does the economic order size. An example is the development of techniques to reduce costs of activities like set up. SMED, or single minute exchange of dies, emphasizes fast set-ups. In applying SMED, analysts use videotapes and methods analysis to make sure equipment is not off-line foo long when set-ups are needed. What SMED does is reduce the economies that go with the batch model. 

If usage approaches production or we reduce the cost of changes, we converge on the flow model or river of goods moving through the supply chain. The rate of production is matched to the rate of demand, and production is continuous. In the flow model, there is also minimum inventory in the supply chain. The root cause that had justified this inventory has been variability. Variability includes the difference between forecasts and actual demand and xmcertainties in operational performance. Reliable operations can minimize these uncertainties. 

For very slow rates of r relative to p, there is not much difference between the economic order quantity and the production order quantity. 

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