Ask Question, Ask an Expert


Ask Operation Management Expert

A Make or Buy Analysis

Managers at Wagner Fabricating Company are reviewing economic feasibility of manufacturing the part which it presently purchases from the supplier. Forecasted annual demand for the project is 3,200 units.

Accounting department at Wagner has established a cost of capital of 14%, for use of funds for investments within the company.  Additionally, over the past year US$600,000 has been average investment within the company’s inventory.  Accounting information shows that a total of US$24,000 was spent on taxes and insurance related to company’s inventory.  In addition, an estimated US$9,000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. Remaining US$15,000 was spent on warehouse overhead, including utility expense for heating and lighting.

Analysis of the purchasing operation shows that approximately 2 hours are required to process and co-ordinate an order for the part regardless of the quantity ordered. Purchasing salaries average US$28 per hour, including employee benefits.  Also, a detailed analysis of 125 orders showed that US$2,375 was spent on telephone, paper and postage directly related to the ordering process.

Presently, company has the contract to purchase the part from a supplier at a cost of US$18 per unit.  Though, over the past few months, the company’s production capacity has been expanded.  As a result, excess capacity is now available in certain production departments, and the company is considering that alternative of producing the parts itself.

A 1-week lead-time is needed to obtain the part from the supplier. An analysis of the demand during the lead-time demonstrates that lead-time demand is approximately normally distributed with a mean of 64 units.  Standard deviation was estimated to be the square root of the mean.  Service level guidelines indicate that the company frowns upon more than 1 stock-out per year.

Forecasted utilisation of equipment demonstrates that production capacity would be existing for the part being considered.  Production capacity is available at the rate of 1,000 units per month, with up to 5 months of production time available.  Management believes that with the 2-week lead-time, schedules could be arranged so that the part could be produced whenever needed. Demand at the time of 2-week lead-time is approximately normally distributed, with mean 128 units and a standard of 20 units.  Production costs are expected to be US$17 per part.

A concern of management is that set-up costs will be significant.  The total cost of labour and lost production time is estimated to be US$50 per hour.  Contractual arrangement and demands of union dictate that the company operates 250 days for the year.  Also, an 8-hour shift will be required to set up the equipment for producing the part

Management has also expressed the wish to take benefits of talk about a quantity discount offer from the supplier.  Indications are that the supplier is willing to give the following discount:

Order Size         Unit Cost
0 - 399              US$18.00
400 - 999           US$17.00
1000 - 1799        US$15.85
1800 and over     US$15.00


1. Develop report for Wagner Fabricating which addresses the problem of whether the company must continue to purchase the part from the supplier or begin to produce the part itself.  The report must address the following:

a. An analysis of the holding costs, including the appropriate annual holding cost rate.

b. An analysis of ordering costs, including the appropriate cost per order from the supplier

c. An analysis of the set up for the production operation

d. A development for the inventory policy for the following two alternatives:

i. Ordering the fixed quantity Q from the supplier

ii. Ordering the fixed quantity Q from in-plant production

e. Report must include the optimal quantity Q*, the number of production runs per year, the cycle time, reorder point, safety stock, expected maximum inventory level, annual cost of the units purchased or manufactured.  You require giving a comparative analysis of the cost of purchasing versus cost of producing, and the optimal quantity under the discount policy.

2. Push and pull systems of inventory management and control require to understood fully, in order to apply their principles efficiently. Discuss, in the context of any manufacturing entity in Jamaica (using appropriate exs, as seen fit).  Note, stay within the following word range (WR): 1200 ≤ x ≤ 1600.

Operation Management, Management Studies

  • Category:- Operation Management
  • Reference No.:- M91334

Have any Question? 

Related Questions in Operation Management

After a status meeting a client approaches you as the

After a status meeting, a client approaches you (as the project manager) with a request to incorporate an additional feature into the software your team is developing. She suggests that such a minor change can be 'absorb ...

Briefly describe the improvements made to context switching

Briefly describe the improvements made to context switching over the years. How has the amount of time processors spend on context switches improved? How has hardware helped to make context switching faster?

The industrial revolution changed the way we work the

The Industrial Revolution changed the way we work. The introduction of new technologies and new approaches to production drove the expansion of an urban working class that was wage dependent. To what degree do we still s ...

Identify a recent incident within last six months and

Identify a recent incident (within last six months) and discuss illegal, unethical, and socially responsible bussiness actions in the current news. Include a link to the news article in your discussion post. Note: If we ...

National scan inc sells radio frequency inventory tags

National Scan, Inc., sells radio frequency inventory tags. Monthly sales for a seven-month period were as follows: Month Sales (000)Units Feb.               16 Mar.               17 Apr.               13 May.             ...

Identify changes in forecasting methodologies and

Identify changes in forecasting methodologies and approaches (for practices such as contracting, advanced payments, outsourcing to fix a price, continuous and fixed budgeting, simulations, or regression analysis) that ha ...

Martin fundamental philosophical differences in management

Martin Fundamental philosophical differences in management styles, launch and handling of products and services, marketing of products and services, and approach to e-commerce that sets one rival company apart from the o ...

Australian banks charge fees on loan and deposit account

Australian banks charge fees on loan and deposit account. analyses the reason why bank fee income from household grew by 2.9% in 2015. (250words)

What area function or division of an organization you are

What area, function, or division of an organization you are familiar with would benefit the quickest from such an improvement to data collection? Marketing? Finance? R&D?

Assess two effects that cultural competencies overall have

Assess two effects that cultural competencies overall have on health care human resources management. Provide specific examples to support your rationale. Compare and contrast problem-based learning and team-based learni ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate