Case: FabQual Ltd. FabQual Ltd. manufactures parts and subassemblies for exchang
ID: 371164 • Letter: C
Question
Case: FabQual Ltd. FabQual Ltd. manufactures parts and subassemblies for exchange rate in the Wall Street Journal.) Part number a number of small-volume manufacturers of specialized 650810/ss/R9/o enters the finished goods stores at a construction equipment, including bulldozers, graders, full manufacturing cost of £55. The Financial Office and cement mixers. FabQual also manufactures and requires a 25 percent per item per year cost for inven- distributes spare parts. The company has made a spe- tory planning and control. (This is your annual holding cialty of providing spare parts for equipment no longer cost rate.) in production; this includes wear parts that are no lon ger in production for any OEM. Case Questions The Materials Management Group (MMG) orders 1. What is the total annual cost of the present ordering parts-both for delivery to a customers production policy for part number 650810/ss/R9/o? line and for spares-from the Fabrication Department. 2. What would be the lot size for part number 650810/ Spares are stocked in a finished goods store. FabQual'sss/R9/o if FabQual were to use an economic order part number 650810/ss/R9/o is a wear part made only quantity (EOQ)? for spares demand. It has had units per week for more than a year, and this level of demand is expected to persist for at least four more years. The standard deviation of weekly demand is 50 units. demand averaging 3003. What would be the total annual cost of using an eco- nomic order quantity for part number 650810/ss/ R9/0? 4. What would be the reorder point for part number 650810/ss/R9/o if FabQual wanted a delivery perfor- 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 three-week manufacturing lead time is mance of 95 percent? What would it be if the com- pany wanted a delivery performance of 99 percent? 5. Under the present scheme-ordering 1300 units each month in the first week of each month-there aretypically 700 to 800 units on hand when the new batch of 1300 units arrives toward the end of each month. What would be the impact on the overall inventory level of part number 650810/ss/R9/o of a change from the present order policy to an EOQ- allowed for parts. In the Fabrication Department, two hours is now allowed for each setup for a run of part number 650810/ ss/R%. This time includes strip-down of the previous setup; delivery of raw materials, drawings, tools and fix- tures, and the like; and buildup of the new setup. The two-hour setup time is a recent improvement over the previous four hours, as the result of setup reduction activities in the Fabrication Department. The Fabrica tion Department charges £20 per hour for setups. (If you prefer to work in dollars, you can find the current based policy 6. What are other implications of a change from the present scheme to one based on the economic order quantity? If this part is representative of a great many spare parts, what would be the overall impact:? Source: Copyright O by Professor L.G. Sprague, 1999 Reprinted with permissionExplanation / Answer
Ans:
(a) Total cost = Purchase cost + Holding cost + Ordering cost
= 55x15600+ 55x0.25x1300/2 + 12x20x2
= 858000+8937.5+480 = 867417.5
(b) In case of EOQ, the optimum quantity is
Q = [ 2x 15600x40 / 55x0.25]1/2 = 301
Total cost using EOQ = 55x15600+ 55x0.25x301/2+ 20x2 x15600/301
= 858000+ 2069+2073 = 862142
Ans 4: The reorder level with 95% delivery performance ( z=1.65) ( with curent policy)
= Lead time x Avg. demand per week+ z xS.D. of weekly demand x(Lead time)1/2
= 3x300+ 1.65x 50x (3)1/2 =900+142,89 = 1043
If the required delivery performance is 99% ( z=2.33)
Reorder level is
= 3x300+ 2.33 x50 x(3)1/2 = 900+201.78 = 1101.78 = 1102