Guidelines for setup-cost reduction programs to achieve zero inventory

This paper is organized into six sections. The first two sections introduce the problem and review the relevant literature. The third section determines for a single item operating under the EOQ assumptions, what fraction setup must be reduced to achieve a target order quantity. The target may be zero-inventory, which is alternately defined as an EOQ of one or lot-for-lot production. A simple graph for use by managers is provided to show the relationship of target order quantity and fraction setup reduction required. In the fourth section, the implications of setup reduction are extended to multiple items. The principal management issue in this situation is that given two items, which item should be scheduled for setup reduction first. Section five develops a formula for determining the maximum allowable setup cost to achieve lot-for-lot (zero-inventory) production for the case of time-varying demand. Using a marginal cost approach, the authors determine that a manager need only target setup reduction to justify not batching the lowest expected single period demand over the planning horizon. The final section considers the application of the savings ratio concept to multiple items with time-varying demand. This research is unique in that it suggests guidelines for managers initiating setup-reduction agendas with multiple items. The present research shows that the potential savings and preferred sequence of reductions is dependent on the interactions of several item parameters (i.e. current setup cost, unit costs, total demand, demand variability, and target lot-size). To account for these interactions the authors introduce the savings ratio as a simple procedure to prioritize items for setup reduction.