Harris, in the original 1913 paper on the \(\mathrm{EOQ}\) model, suggested that "most managers, indeed, have a rather hazy idea as to just what this [setup] cost amounts to." a. Do you think that setup cost, as defined in the EOQ model, is more easily specified today than in 1913 ? Why or why not? b. Give some examples of costs that might make up this setup cost. c. What might setup cost in the model actually be serving as a surrogate for in the real system?

To determine if the setup cost is more easily specified today than in 1913, let's consider the advancements in technology, communication, and management systems that have been developed since 1913 and how these might have affected the specification of setup costs. - Improved data collection and communication technology allows for more comprehensive, accurate, and faster recording of cost components. - Enhanced management systems and tools have simplified the tracking and allocation of costs, making it easier to determine the overall setup cost. - The concept of setup cost is more widely known and accepted today, with a greater understanding of its implications on inventory management. Considering these advancements, it is likely that setup cost is more easily specified today than it was in 1913. This is due to better data collection and communication, improved management systems, and increased knowledge and understanding of the concept. #b. Examples of setup cost components#

The setup cost in the EOQ model includes all costs associated with preparing an environment for the production or procurement of inventory. Some examples of costs that might make up this setup cost are: 1. Labor costs: Time and wages required to set up machinery or other equipment for production. 2. Equipment costs: Costs related to scheduling and preparing machinery, tools, and equipment for production. 3. Inspection and quality control: Costs associated with ensuring the quality of incoming materials and production processes. 4. Procurement costs: Costs related to supplier selection, negotiation, and purchase order generation. 5. Transportation costs: Costs associated with moving materials and products between suppliers, distribution centers, and production facilities. 6. Administrative costs: Overhead expenses related to managing procurement or production processes. #с. Setup cost as a surrogate in the real system#

The setup cost in the EOQ model can be seen as a surrogate for a variety of costs and inefficiencies associated with managing inventory. In the real system, the setup cost may represent: - The effort required to manage and coordinate inventory, including determining reorder points, tracking stock levels, and organizing procurement or production processes. - The inefficiencies and costs associated with delays, stockouts, and various disruptions in the inventory management system. - The costs of storing and handling inventory, including warehousing, security, and insurance expenses. - The costs of obsolescence, spoilage, and waste of inventory due to inadequate management. In summary, setup cost in the EOQ model is a surrogate for the various real-world costs and inefficiencies associated with the management of inventory, reflecting the complexity and challenges faced by managers in optimizing inventory levels and procurement processes.