Gemini Fabricators
(This case deals with inventory decision making and EOQ concepts.)
Gemini Fabricators produces parts and subassemblies for a number of small-volume manufacturers of specialized construction equipment, including bulldozers, graders, and cement mixers. Gemini also manufactures and distributes spare parts. The company has made a specialty of providing spare parts and replacement parts for equipment no longer in production by the original equipment manufacturers.
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. Gemini'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 in the foreseeable future.
The MMG has been ordering 2600 units every other month for part number 650810/ss/R9/o from the Fabrication Department to meet the forecast annual demand of 15,600 units. The order is placed at the beginning of every other month. In order to provide Fabrication with scheduling flexibility, as well as to help with planning raw material requirements, a 2-week manufacturing lead time is allowed for parts.
In the Fabrication Department, 3 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, etc; and buildup of the new setup. The 3-hour setup time is a recent improvement over the previous 4 hours, as the result of setup reduction activities in the Fabrication Department. The Fabrication Department charges $35 per hour for setups. Part number 650810/ss/R9/o enters the Finished Goods Stores at a full manufacturing cost of $40.44. The Financial Office has indicated a 10% per unit per year holding cost (based on its full manufacturing cost).
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 Gemini were to use an economic order quantity (EOQ)?
3. How frequently would Gemini be ordering part number 650810/ss/R9/o if they were to use the EOQ?
4. What would be the total annual cost of using an economic order quantity for part number 650810/ss/R9/o?
5. What would the annual cost savings be if Gemini were to use an EOQ approach to ordering rather than the current policy of ordering 2600 units in each replenishment?
6. Assuming that the 300 units per week demand for part number 650810/ss/R9/o is fairly uniform, what would the reorder point be for this item?