Management : What is the most economical quantity of inventory to order

Subject: Business    / Management
Question

You work for a manufacturer in the automotive industry. The company has been in existence for ten years and is not doing very well. You know if you can get a contract with Ford Motor Company things will greatly improve from a financial stand point. However, before the company can approach Ford about doing business you must take close look at your company and make improvements to reduce costs and improve quality. You know you are losing money and your outdated processes and management practices are contributing to your problems. You brought in a management consultant to assess you situation. The consultant made the following observations.

Inventory – The consultant found that you are carrying a 3 month supply of your most expensive raw material. You have two weeks supply of the shop floor, 2 weeks in the main warehouse and 2 month supply in a rented off site warehouse. He analyzed the inventory costs associated with this raw material. Costs are as follows:

Annual Usage – 16,000 units

Ordering Cost – $50 per order

Carrying Cost- $2.50 per unit

Products and Manufacturing Processes – The consultant took a look at your product line and your production process and made the following observations. The company produces one main product for the automotive industry. That product is the aluminum luggage rack that are on the top of certain SUV’s. No other products are produced. The plant is using simple metal bending and stamping equipment. The fixtures used to create the product on this equipment are inexpensive. The plant also has an anodizing tank where one of two colors, gold or bright aluminum is applied. The plant operates one shift per day, five days per week. Productivity is low due to the time it takes to change colors in the anodizing tank. The plant has been modified and added on to numerous times in the past ten years. As business grew walls were knocked and space added. Because of this the manufacturing flow is disrupted and excessive work-in-process inventory is built up. This addition inventory is taken to storage by a forklift.

The company utilized an assembly like process in making the product. The workers are in a union and there are tensions with management. The main source of this tension is due to the unwillingness of the union to allow workers to be crossed train for other jobs in the factory.

Quality Assurance – The company has one person in quality control. This person is an Industrial Engineer and has had training Statistical Quality Control methods. The most important step in the manufacturing process, coating thickness, uses control chart to monitor the process. This process is in control and has a calculated standard deviation of .05. The process mean is .8. Ford has set an upper specification limit of 1.0 and a lower specification limit of .7. Ford also requires a Cpk value of equal to or greater than 1.33. This is the only process in the plant that uses statistical process control. Other process including bending and hole punching are experiencing defect rates of 1%. That equates to 10,000 defects parts per million produced.

YOUR ASSIGNMENT- You have been assigned the task of addressing the issues found by the consultant. These issues must be addressed in the form of a report to management – just listing answers to these questions is not acceptable. Charts can be inserted if necessary.

1. What is the most economical quantity of inventory to order? How many orders will you need to place each year?

2. Are you carrying the proper amount of inventory of your main raw material? Why or why not?

3. How can proper inventory management save the company immediately?

4. What recommendation would you make regarding product mix? If you expand the line, what type of product would you add and why?

5. What would you recommend to reduce the time it takes to change colors in the anodizing process.

6. Where do you find waste that can be eliminated to make the process leaner?

7. What can be done to improve labor relations in order to allow management to redesign the manufacturing process?

8. How would you improve the manufacturing process to improve productivity?

9. What quality tools area available to improve the defect rates at the bending and hole punching process?

10. As it currently stands can the company produce product that meets Ford’s specifications? Why or why not?

You have no idea how your operations stacks up with similar operations. Now it’s time for you to figure out various avenues of improvement for your company. Prepare a detailed business report that addresses each of the above items. Make certain the report covers how you would address and recommend corrections for each of the situations mentioned above. You are to include details regarding each type of equipment that you would recommend purchasing, training and incentive programs, and anything else necessary to get the company operating in a world-class modern environment. Feel free to include diagrams, drawings, equipment specifications, etc. as supplemental materials to your written report.

Minimum of 5 written pages in APA Format
An in-depth knowledge of the subject matter is illustrated
Citing of any all references
Professional grammar and punctuation
Detailed explanations as to how you arrive at your answers/conclusions
Each topic must be addressed in as much detail as possible
Sketches, drawings, diagrams and pictures are permitted to help demonstrate your answers
If a report supplements the PowerPoint presentation, it must be written in a professional format that can be presented to a client