Optimizing Raw Material Orders for Automotive Brake Caliper Production

Scenario

Project Type: Manufacturing process optimization for Tier-1 automotive supplier Location Context: Tier-1 supplier plant in Warren, Michigan, producing brake calipers for domestic OEMs Constraints: Limited warehouse space (max 450 units of cast iron billets on-hand), strict JIT delivery windows from foundry (lead time = 7 days), and volatile scrap rates requiring consistent lot sizing to minimize rework variability.

Given Data

• Annual demand (D): 8,400 units/year (calculated from 350 production days × 24 calipers/day, accounting for 95% yield)
• Setup cost per order (S): $185/order (includes engineering change verification, quality gate inspection, and logistics coordination with foundry)
• Holding cost per unit per year (H): $3.60/unit·year (12% annual capital cost + $0.75/sq.ft./yr storage + insurance; based on $30/unit material cost and 1.2 sq.ft./unit footprint)

Calculation

EOQ formula: $$ \text{EOQ} = \sqrt{\frac{2DS}{H}} = \sqrt{\frac{2 \times 8400 \times 185}{3.60}} = \sqrt{\frac{3,108,000}{3.60}} = \sqrt{863,333.33} \approx 929.2 \text{ units} $$ Rounded to nearest whole unit: 929 units.

Result and Decision

The calculated EOQ (929 units) fits within warehouse capacity (450 units on-hand constraint is misinterpreted — actual constraint is average inventory, not max stock; average inventory = EOQ/2 = 464.5 units, slightly exceeding 450). To comply, the team adopted a modified EOQ of 900 units, reducing average inventory to 450 units while increasing total cost by only 0.3%. Orders are placed every 39 days (900 ÷ 8400 × 365), aligning with foundry’s biweekly scheduling window.

Lesson

Warehouse constraints often govern average or peak inventory—not just EOQ magnitude—so always validate EOQ against operational limits (e.g., floor space, rack capacity, or FIFO shelf life) before implementation.