Manufacturing and Economic Order Quantity

(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 activities in the Fabrication Department. The Fabrication Department charges $20 per hour for setups. Part number 650810/ss/R9/o enters the Finished Goods Stores at a full manufacturing cost of $55. The Financial Office requires a 25% per item per year cost for inventory planning and control. (This is your annual holding cost rate).

Analysis:
1. Calculate the total annual cost of the present ordering policy for part number 650810/ss/R9/o. 2. Calculate the lot size for part number 650810/ss/R9/o if FabQual were to use an economic order quantity (EOQ). 3. Calculate the total annual cost of using an economic order quantity for part number 650810/ss/R9/o? 4. Determine the reorder point for part number 650810/ss/R9/o if demand was always occurring at the uniform rate of 300 units per week. 6. Determine the cost implications of a change from the present scheme to one based on the economic order quantity.

Assignment:
Write a report to the director of the Materials Management Group (MMG) in which you provide your recommendations on how this inventory part (part number 650810/ss/R9/o) should be managed. Provide rationale for your recommendations (your rationale will come from the above calculations).