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

Required

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

Conflictdefine functional versus dysfunctional conflict in

Conflict Define functional versus dysfunctional conflict in a work group and explain how you can increase functional conflict and decrease dysfunctional conflict. Develop a response that includes examples and evidence to ...

For this assignment you will need to find 2 articles in

For this assignment, you will need to find 2 articles in business that can help describe what are IT strategic initiative being undertaken by an organization are like. Choose a different organization for each of the arti ...

Coping with problems joe is a little nervous he has just

Coping With Problems Joe is a little nervous. He has just been transferred from another plant to take over a production line. Production is down and there is a serious problem with absenteeism. To make matters worse, the ...

Over 30 years ago michael porter identified a holistic

Over 30 years ago Michael Porter identified a holistic approach to understanding how competitive forces shape strategy. He posited that the only way to truly insulate an organization from underlying economic volatility i ...

You are the contracting officer for an air-to-ground

You are the contracting officer for an air-to-ground missile development program. A contract for pre-production models of the missile was awarded by your predecessor and the contractor is behind schedule. In a program me ...

The ikea case provides an excellent opportunity to apply

The IKEA case provides an excellent opportunity to apply strategic management concepts to a large privately-held company that is expanding into India. IKEA is a Netherlands-based Swedish company with a presence in 44 cou ...

Can you answer for me the following questions about social

Can you answer for me the following questions about social loafing and the three main causes of free-riding. 1. Give a description of the phenomenon of social loafing. 2. Give a description of the phenomenon of free-ridi ...

1 analyzing the bridgestonefirestone and ford motor company

1. Analyzing the Bridgestone/Firestone and Ford motor company, is it sufficient to use the ISO/QS 9000 standards as the main basis of vendor/product selection? 2. What position to these cars company ( 1. Volkswagen, 2. F ...

Research the effect of primary and secondary seat belt laws

Research the effect of primary and secondary seat belt laws on the occurrence of motor-vehicle injuries and fatalities. Explain how epidemiologic studies influenced the development of current seat belt laws. Describe how ...

Please provide a brief paragrap of the key takaways from

Please provide a brief paragrap of the key takaways from each of the following topics: Designing Clear Visuals in business reports Designing Successful Documents and Websites Writing Winning Proposals

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As