FabQual Ltd. manufactures parts and subassemblies for a number of small-volume manufacturers of specialized construction equipment, including bulldozers, graders, and cement mixers. FabQual also manufactures and distributes spare parts. The company has made a specialty of providing spare parts for equipment no longer in production; this includes wear parts that are no longer in production for any OEM.
The Materials Management Group (MMG) orders parts- both for delivery to a customer's production line and for spares-from the Fabrication Department. Spares are stocked in a finished goods store. FabQual's part number 650810/ss/R9/o is a wear part made only for spares demand. It has had demand averaging 300 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.
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 allowed for parts. In the Fabrication Department, two hours is now allowed for each setup for a run of part number 650810/ss/R9/o. This time includes strip-down of the previous setup; delivery of raw materials, drawings, tools and fixtures, 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 Fabrication Department charges £20 per hour for setups. (If you prefer to work in dollars, you can find the current exchange rate in the Wall Street Journal.) Part number 650810/ss/R9/o enters the finished goods stores at a full manufacturing cost of £55. The Financial Office requires a 25 percent per item per year cost for inventory planning and control. (This is your annual holding cost rate.)
Case Questions
1. What is the total annual cost of the present ordering policy for part number 650810/ss/R9/o?
2. What would be the lot size for part number 650810/ss/R9/o if FabQual were to use an economic order quantity (EOQ)?
3. What would be the total annual cost of using an economic order quantity for part number 650810/ss/R9/o?
4. What would be the reorder point for part number 650810/ss/R9/o if FabQual wanted a delivery performance of 95 percent? What would it be if the company 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 are typically 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-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?