In the course of Operations Management was given to us a Harvard Business case study, “Blanchard Importing and Distributing Co. , Inc”. The company is a liquor distributer and bottler which, is struggling with inventory management problems. The aim of our work is to help the trainee, Hank Hatch, analyzing the company’s scheduling system and present recommendations with the purpose of solving problems intrinsically related with Inventory management.
Firstly, we are going to calculate the EOQ and ROP quantities based on 1971’s demand, then we compare this values with the ones obtained upon the implementation of the Scheduling system, in 1969, as well as with the scheduling system invented by Bob and Elliot . We are also going to approach the differences between the formal and the informal systems, choosing the best one for the company and finally present our recommendations which are aimed to solve the detected problems. Economic Order Quantity Model
Operations Managers regularly face with decisions of “How much” or “How many” of something to produce or buy in order to satisfy the internal and external requests for a certain item. The majority of those decisions do not always take into account the cost consequences that would occur. The Economic Order Quantity Model, and also so-called “EOQ Formula”, is often very helpful in guiding managers about the order quantity decision regarding consequences. The EOQ Model was developed by Ford W.
Harris in 1913 and it corresponds to the level of inventory that minimizes the total holding costs and ordering costs of the inventory. Graphic In other words, the Economic Order Quantity is known as the cost-minimizing order-quantity which takes in consideration the existing tradeoff between ordering cost and storage cost. Basic assumptions of this Model: Replenishment occurs instantaneously; Demand is constant and not stochastic; There is a fixed setup cost K independent of the order quantity; Only one product is involved; Leadtime is zero, does not vary; There are no quantity discounts.
Leadtime According to EOQ Model, the leadtime is zero. The leadtime is the time interval between placing the order and receiving the corresponding order quantity which means that delivery or manufacturing is instantaneous, the replenishment occurs instantaneously. Although this assumption is obviously unrealistic, it removes the question “When to order? ” by answering to order “Q” units each time inventory falls to zero. Costs The EOQ Model presents three types of costs: Cost of the units themselves; Cost of holding units in inventory; Fixed order cost or manufacturing setup cost.
The unit cost is the cost of the units themselves, denotes C, and is assumed to be fixed regardless the number of units ordered or manufactured. The holding cost or carrying costs, denotes h, represents the management’s cost of capital, the time value of money invested in units; includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. The setup cost, denotes S, represents all the costs associated with placing an order without consider the cost of the units themselves, for instance, any administrative cost of placing and/or receiving an order.
Reorder Point The reorder point (ROP) also called reorder level, reorder quantity or replenishment order quantity is the inventory level of an item which signals the need for placement of a replenishment order. So, the ROP occurs when the level of inventory drops down to zero. To compute ROP is necessary to perceive the minimum level of inventory that is held as a protection against shortages, safety stock. Reorder Point = Normal consumption during leadtime + Safety Stock Determinants of the reorder point: Rate of demand; Leadtime; Extent of demand and/or leadtime variability; Degree of stockout risk acceptable to management.
Case Analysis 1. Recalculating EOQ and ROP Recalculating EOQ: We have to take into consideration the new information about demand and the relevant costs. The relevant costs are: setup costs, holding costs and Unit Costs. For the Demand we use the total demand of 1971 (exhibit 5). Setup Cost: To calculate the setup costs, we had only taken into account the ones which varied with the number of setups, as we can observe, the only one with this characteristics is the label changeover cost. The time needed to reset machinery to a different kind of label is 30 minutes, during that time all the five part-time workers remain idle.
Hence incurring in a cost equal to the salary earned by this five workers in the half an hour stop. Holding Cost: We use the 22. 5% value said on the guidelines of the case. Unit Cost: For the unit cost, we should only consider the expenses that Blanchard supports when producing. Thus, for the calculation we will sum the Materials cost, the bottling labor, the variable overhead, the customs duty and the federal rectification tax. Our selection was based on two assumptions: variable costs and the costs paid before the sales.