Case Study: UPD Manufacturing

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Case: UPD Manufacturing


Demand, d = 6
Ordering Interval, OI = 89
Ordering cost, S = $32
Holding Cost/Carrying Cost, H = $.08

As there is no demand variability, the formula for quantity is:  
Q = d (LT + OI) – A  
(as there is no safety stock)     ------- A - ROP (Reorder point)  
We know, A = d * LT, so the fixed order interval order quantity equation Q becomes

Q = (d * LT) + (d * OI) – (d * LT)
  * Q = d * OI = (6) (89)  = 534 units   
Therefore, ordering at six-week intervals requires an order quantity of 534 units.  
Now, the optimal order quantity is determined by using EOQ equation.  
Q = sqrt(2dS/H)
    = sqrt[(2*89*32)/.08] 
    =   266.833 (or) 267

The weekly total cost based on optimal order quantity EOQ is given below:

TC of EOQ = (d/q)*s + (q/2)*H
    = (89/267)*32 + (267/2)*.08
    = 10.6666+ 10.68
    = 21.3466

The weekly total cost based on six-week fixed order interval (FOI) order quantity is given below:

TC of FOI = (d/q)*s + (q/2)*H
      = (89/534)*32 + (534/2)*.08
      = 5.3333+ 21.36
          = 26.6933 

 Weekly savings of using EOQ rather than 6-week FOI is 26.6933 – 21.3466 = $5.3467 The annual savings = (52 weeks) * ($5.3467 /week) = $278.02
The total annual savings as a result of switching from six-week FOI to EOQ are relatively small and switching to the optimal order quantity may not be warranted. However, even though the absolute value of the savings is relatively small, the percentage of savings is approximately 25.05% (5.3467 / 21.3466). Therefore if FOI approach is used with other parts or components as well, the total potential loss may be significant.

Q1| Would using an order interval other than every six weeks reduce cost? Is so, what order interval would be the best, and what order size would the involve?| | 1. No, using an order interval can't reduce cost unless UPD Manufactoring has good inventory system. | | 2. Inventories are use to satisfy demand requirements, so it essential to have reliable estimates of the amount and timing demand. |

| 3. It is essential to know how long it will take for order to be deliver.| | | | 4. UPD Manufacture should know the extend to which demand and lead time (time between submitting an order and receiving it) the greather the pontential variability, the greater for need additional stock to reduce the risk of shortage between deliveries.| | 5. The good exercise in an inventory, UPD Manufacturing should have Point-of-sale (POS) system electronical record actual sales. Knowledge of actual sales can greatly enhance forecasting and inventory management: By relaying information about actual demand in real time, these system enable management to make any necessary changes to restocking decisions. These systems are being increasing emphasized as an important input to effective supply chain management by making this infomation available to suppliers.| | | | | | | | | | |

Q2| Would recommend changing to optimal order interval?|
| 1. UPD Manufacturing still can used order intervals if there has good Inventory Planning System. This is important because function of inventory as following:| | | a) To meet anticipated customer demand|

| | b) To smooth production requirements|
| | c) To protect againts stockouts|
| | d)To take advantage of order cycles|
| | e) To hedge againts price increases|
| 2. Inventory management is primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials.| | 3. The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory,...
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