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A) Review exiting my report “Intelligent Microwaves Inc Optimization Case (file attached))” and ensure that the report meets the rubric shown in the “Microwave Inventory Case Description (file attached))” rubric shown below.B) On the report ensure the following: For items 2 to 4 use the Analysis Tab from the spread sheet (file attached). 1. Using the Current Model from the spread sheet (Intelligent Microwaves Inc Optimization) Provide a description that IMI are providing consistent service levels even though the average is 98%.2. On the Economic Order Quantity (EOQ) and Reorder Point (ROP) section, explain how and why: EOQ balances order cost and holding cost to calculate the parameters that will meet customer service needs at minimal cost.3. Risk Pooling section explain why and how: risk pooling and the need for safety stock because the pool variances for individual models. 4. Extra Section: Experiment the single model and determine whether changing any parameters such as hiding unit from an order cost might impact total cost and then make a specific recommendation. Also provide theoretical ideas. Used column K from the Analysis tab spread sheet to change parameters.5. Provide charts and graphs for the analysis. Summarize the cost in a chart and graph the cost savings that present the results in an insightful manner. Provide the meaning behind the numbers. Used column K from the Analysis tab spread sheet to change parameters and to compare graphs and charts. Graphs shall represent the EOQ process, reorder point process and forecast method. Graphs shall provide difference between current method vs recommended method. 6. Finally, on the Executive summary section: discuss overall processes and mention single model as well as other ideas for savings and provide a total potential benefits number, provide numbers.7. Rewrote the conclusion part to update the information.
intelligent_microwaves_inc_optimization_case.docx

intelligent_microwaves_inc_optimization.xlsx

microwave_inventory_case_description.docx

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Name:
Christian Torres
Course:
OM607 Introduction to Supply Chain Management
Project:
Microwave Inventory Case
Company:
Intelligent Microwave Inc
Case:
Optimization of Product Delivery Utilizing Supply Chain Management Concepts
Date:
November 10, 2017
Torres
IMI BACKGROUND
Intelligent Microwaves, Inc. (IMI) produces a wide range of personal and commercial
microwaves, including a heavy-duty microwave oven for use in restaurants and other heavy use
environments. Their microwaves are considered to be very reliable and have many “intelligent”
features that customers appreciate. Recently, however, competitive price pressures have cut into
IMI’s profit margins and they are taking a look at their operations to try to find ways to reduce
cost while maintaining or improving product quality and customer service. You have been asked
to look at their production and distribution of their heavy-duty microwave oven.
IMI actually produces 6 models of the heavy-duty microwave but they are essentially the
same except for the power supply and the language of the instructions that are on the microwave.
These differentiating features result in the 6 models and are necessary to meet the requirements
of different overseas customers. IMI has always produced each microwave model in batches
large enough to satisfy one month’s worth (30 days) of average demand. Historical records
indicate it takes them on average 30 days, with a standard deviation of 4 days to produce a batch
and an average of 7 days, with a standard deviation of 2 days, to ship a batch of microwaves to
the appropriate warehouse in the appropriate country. There is a setup cost of $1000 to get the
production line prepared to produce any of the heavy-duty models. One microwave of any
model is valued at $500. Through trial and error over the last few years, IMI has found that
using a reorder point of 51 days of supply (51 times the average daily demand) has given them a
reliable performance, only running out of microwaves about 2% of the time while waiting for a
new shipment to arrive. IMI uses an inventory carrying charge of $.25 per dollar of inventory
per year.
Page 2 of 9
Torres
EXECUTIVE SUMMARY
We have been contracted to analyzed the current state of the IMI company and to
optimize their Supply Chain Management (SCM) process. IMI, is currently being faced by price
cuts competition from its competitors which has led to dwindling of the company profits.
Therefore it would be optimal if the company implements a proper stock management process
which will enable the company to order the best optimal order quantity at the lowest prices. As
well as have an optimal reorder point which will allow the organization to cut down the costs
reducing the stock management costs as well as maintain proper stock levels to avoid stock out
issues which could lead to increase in stock out costs.
The company currently maintains a reorder point of 51 days and which this was arrived at
through trial and error thus exposing the firms to risks of stock out costs which could detrimental
to the company. However also if the reorder level is not factored and calculated properly this
could lead the company to increased holding costs which are brought about keeping a large
number of stocks in the company warehouse which are not necessary. The analysis shown in
Appendix A “Current State” demonstrate that the current state SCM approach is not use to the
full potential. In the contrary the analysis shown in Appendix B “Optimal State” demonstrate
that using the using SCM approach the company can benefit from the scientific approach by
reducing shipping time and increasing production in a single item.
Page 3 of 9
Torres
ANALYSIS
(1) Under the initial model the company annual total cost is $ 55,538,250 which is
distributed as follows per model that is for model A is $ 2,245,667, B is $ 4,106,917, C is $
16,391,167, D is $ 6,526,542, E is $ 18,066,292 and F is $ 8,201,667. The most of the annual
total cost is on purchase which is $ 54,385,000 whereas the holding costs are $ 1,080,250 and
fixed costs being $ 73,000. It is also noted that the company has an average service level of
0.9800 which represents a 98% probability of stock outs. Table 1 represents the current cost of
IMI’s inventory practices.
Inventory Performance:
Microwave Model
Service Level
A
B
C
D
E
F
Total
0.9254
0.9818
0.9852
0.9941
0.9986
0.9952
0.9800
2,190,000
4,015,000
16,060,000
6,387,500
17,702,500
8,030,000
54,385,000
Cycle Stock
22,500
41,250
165,000
65,625
181,875
82,500
558,750
Safety Stock
21,000
38,500
154,000
61,250
169,750
77,000
521,500
1,080,250
12,167
12,167
12,167
12,167
12,167
12,167
73,000
2,245,667
4,106,917
16,391,167
6,526,542
18,066,292
8,201,667
55,538,250
Calculation of Total Cost
Purchase Cost
Annual Holding Cost:
Annual Fixed Order
Cost
Annual Total Cost
Table 1: IMI’s Inventory Current Practices
(2) If the company adopts the scientific models that through use of the Economic Order
Quantity (E.O.Q) model it would enable the organization to get the optimal order quantity and
reorder point without the use of the trial and error method prior implemented by the company.
Thus the company will be able to get the optimal order quantity as compared to the current
practice where it analyzes the order quantity by checking the average demand which this may
fluctuate due to the various factor which can be under consideration under the current model.
Page 4 of 9
Torres
The reorder point under the initial model was factored on trial and error previous employed by
the company which may be optimal to firm as they may not experience any stock outs. However,
the company may not have noted of the holding costs which may have been brought about. Thus,
under the initial model, the holding costs are for $ 1,080,250 compared to the holding costs of $
631,457.47 which the company can save up to $ 448,795.3 which is saving of 41% of the
holding costs.
(3) If the company could embrace the single model, this would enable one to have a
single model of microwave compared to many models as per the current model where they have
up to 7 models of microwaves in stock. Thus through this model, the company would save on the
holding costs for the microwaves as this the company would stock fewer microwaves as
compared to the current model where they stock different models of microwaves. The holding
costs for the single model is $ 447,358 as compared to $ 1,080,250 for the current model which
the firm will save up to $ 632,892.
It’s reasonable that IMI might cut costs in the long term when they rely on a single production
line. The company needed standardized raw materials which would allow them to manufacture
the finished products to their customers. Once they completed the production, they only needed a
day to customize the products to the requirements of the individual destination.
(4) If the company could embrace the single model, this would enable the firm to order in
large quantity for same components, and they could be awarded quantity discounts on purchase
thus saving costs on the purchase costs. Also, reduce the cost of transport as this current model
they get different components from different suppliers, but under the single model, they get same
components and probably from a single supplier.
Page 5 of 9
Torres
When the company embraces the scientific the economic order quantity this will enable
the organization to save on holding costs as the company will be having the optimal ordering
stock and lead time and as per the analysis, the company had saved up to $ 632,892 on the costs.
This is also replicated in the number of the safety stock which under the current model is 4,172
compared to 2,919 under the single model. Also, on the reorder point, this will reduce the cost of
the stock out which as per the current model the company has an average of 2% of the stock out,
but some models have a probability of 7.4% of stock out. However, under the proposed single
and E.O.Q model, the probability of stockout is 2% irrespective of the model.
Economic Order Quantity and Safety Stock create an understanding of the areas that require
adjustments and those which have a success potential if well utilized. The company might take
advantage of the areas and implement the changes accordingly, IMI could standardize its
inventory that’s fundamental to a reduction in the time wastage.
Page 6 of 9
Torres
CONCLUSION
When the company embraces the scientific approach that is the use of the economic order
quantity the system can achieve the desired service level of 0.9800 irrespective of the model of
the microwave. Compared to the current model where lead time has been set through trial and
error method where the service level fluctuates per model to which some surpass while others
don’t achieve the service level. It is also noted that the costs annual total costs reduce for the
scientific approach compared to the other models whereas the purchase costs remain the same
irrespective of the model used. Under the reorder point it significantly changes on the each of
models used whereby per each model there is a notable change in the reorder point.
The company might consider investing drop shipping that is the company installs a
system whereby instead of shipping the microwaves from the warehouse they agree with the
manufacturer and ships the products directly to the consumer. Through this, the company will be
able to save on the holding costs because we won’t be involved in stocking the inventory at the
warehouse. Also, the company can use ABC system that is Pareto analysis whereby they rank the
inventory items according to the total value of the annual basis and prioritize the inventory
management system.
Page 7 of 9
Torres
Appendix A: IMI Current Practice
Microwave Model
A
B
C
D
E
F
Total
500.00
500.00
500.00
500.00
500.00
500.00
0.25
0.25
0.25
0.25
0.25
0.25
1000.00
1000.00
1000.00
1000.00
1000.00
1000.00
Average
12
22
88
35
97
44
Std. Dev.
17
18
67
19
22
22
360
660
2640
1050
2910
1320
Average
7
7
7
7
7
7
Std. Dev.
2
2
2
2
2
2
Average
30
30
30
30
30
30
Std. Dev.
4
4
4
4
4
4
Average
37.00
37.00
37.00
37.00
37.00
37.00
Std. Dev.
4.47
4.47
4.47
4.47
4.47
4.47
Average
444
814
3256
1295
3589
1628
Std. Dev.
117
147
567
195
454
238
Reorder Point
612
1122
4488
1785
4947
2244
15198
Safety Stock Level
168
308
1232
490
1358
616
4172
0.9254
0.9818
0.9852
0.9941
0.9986
0.9952
0.9800
2,190,000
4,015,000
16,060,000
6,387,500
17,702,500
8,030,000
54,385,000
Cycle Stock
22,500
41,250
165,000
65,625
181,875
82,500
558,750
Safety Stock
21,000
38,500
154,000
61,250
169,750
77,000
521,500
12,167
12,167
12,167
12,167
12,167
12,167
73,000
2,245,667
4,106,917
16,391,167
6,526,542
18,066,292
8,201,667
55,538,250
$ Value
Holding Cost Factor
Fixed Cost Per Order
Daily Demand:
Order Quantity
Ship Time (days):
Production Time (days):
Lead Time (days):
Demand during Lead Time:
Inventory Performance:
Service Level
Calculation of Total Cost
Purchase Cost
Annual Holding Cost:
Annual Fixed Order
Cost
Annual Total Cost
Page 8 of 9
Torres
Appendix B: IMI Analysis “Optimal State”
Economic Order Quantity and Safety Stock
Microwave Model
$ Value
Holding Cost Factor
Fixed Cost Per Order
Daily Demand:
Average
A
500.00
0.25
1000.00
B
500.00
0.25
1000.00
C
500.00
0.25
1000.00
D
500.00
0.25
1000.00
E
500.00
0.25
1000.00
F
500.00
0.25
1000.00
12
22
88
35
97
Std. Dev.
17
Order Quantity
265
Ship Time (days):
Average
7
Std. Dev.
2
Production Time (days):
Average
30
Std. Dev.
4
Lead Time (days):
Average
37.00
Std. Dev.
4.47
Demand during Lead Time:
Average
444
Std. Dev.
117
Desired Service Level
0.9800
Reorder Point
683
Safety Stock Level
239
Inventory Performance:
Service Level
0.9800
Calculation of Total Cost
Purchase Cost
2,190,000
Annual Holding Cost:
Cycle Stock
16,545
Safety Stock
29,909
Anuual Fixed Order Cost
16,545
Annual Total Cost
2,252,999
18
358
67
717
19
452
7
2
7
2
30
4
Total
500.00
0.25
Single Model
Reduced on Production and
shipping time
500.00
0.25
1000.00
500.00
0.25
1000.00
44
298
298.00
22
753
22
507
80.19
1319
80.19
1319
7
2
7
2
7
2
8
2
6
2
30
4
30
4
30
4
30
4
30
4
27
4
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
38.00
4.47
33.00
4.47
814
147
0.9800
1116
302
3256
567
0.9800
4420
1164
1295
195
0.9800
1695
400
3589
454
0.9800
4521
932
1628
238
0.9800
2117
489
3,525.78
11324
1421
0.9800
14243
2919
9834
1410
0.9800
12730
2896
0.9800
0.9800
0.9800
0.9800
0.9800
0.98
0.9800
0.9800
4,015,000
16,060,000
6,387,500
17,702,500
8,030,000
54,385,000.00
54,385,000
54,385,000
22,403
37,789
22,403
4,097,594
44,805
145,443
44,805
16,295,053
28,257
49,949
28,257
6,493,963
47,041
116,542
47,041
17,913,123
31,682
61,090
31,682
8,154,454
190,732.28
440,722.41
190,732.28
55,207,186.98
82,451
364,907
82,451
54,914,809
82,451
361,990
82,451
54,911,892
Page 9 of 9
IMI Current Practice
A
500.00
0.25
1000.00
B
500.00
0.25
1000.00
C
500.00
0.25
1000.00
D
500.00
0.25
1000.00
E
500.00
0.25
1000.00
F
500.00
0.25
1000.00
Daily Demand:
Average
Std. Dev.
12
17
22
18
88
67
35
19
97
22
44
22
Order Quantity
360
660
2640
1050
2910
1320
7
2
7
2
7
2
7
2
7
2
7
2
30
4
30
4
30
4
30
4
30
4
30
4
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
444
117
814
147
3256
567
1295
195
3589
454
1628
238
Reorder Point
612
1122
4488
1785
4947
2244
15198
Safety Stock Level
168
308
1232
490
1358
616
4172
0.9254
0.9818
0.9852
0.9941
0.9986
0.9952
0.9800
Microwave Model
$ Value
Holding Cost Factor
Fixed Cost Per Order
Total
Ship Time (days):
Average
Std. Dev.
Production Time (days):
Average
Std. Dev.
Lead Time (days):
Average
Std. Dev.
Demand during Lead Time:
Average
Std. Dev.
Inventory Performance:
Service Level
Calculation of Total Cost
Purchase Cost
2,190,000
Annual Holding Cost:
Cycle Stock
Safety Stock
Annual Fixed Order
Cost
Annual Total Cost
4,015,000
16,060,000
6,387,500
17,702,500
8,030,000
54,385,000
22,500
21,000
41,250
38,500
165,000
154,000
65,625
61,250
181,875
169,750
82,500
77,000
558,750
521,500
12,167
2,245,667
12,167
4,106,917
12,167
16,391,167
12,167
6,526,542
12,167
18,066,292
12,167
8,201,667
73,000
55,538,250
IMI Analysis
Economic Order Quantity and Safety Stock
Single Model
Reduced on Production
and shipping time
Microwave Model
A
$ Value
500.00
Holding Cost Factor
0.25
Fixed Cost Per Order
1000.00
Daily Demand:
Average
12
Std. Dev.
17
Order Quantity
265
Ship Time (days):
Average
7
Std. Dev.
2
Production Time (days):
Average
30
Std. Dev.
4
Lead Time (days):
Average
37.00
Std. Dev.
4.47
Demand during Lead Time:
Average
444
Std. Dev.
117
Desired Service Level
0.9800
Reorder Point
683
Safety Stock Level
239
Inventory Performance:
Service Level
0.9800
Calculation of Total Cost
Purchase Cost
2,190,000
Annual Holding Cost:
Cycle Stock
16,545
Safety Stock
29,909
Anuual Fixed Order Cost
16,545
Annual Total Cost
2,252,999
B
500.00
0.25
1000.00
C
500.00
0.25
1000.00
D
500.00
0.25
1000.00
E
500.00
0.25
1000.00
F
500.00
0.25
1000.00
22
18
358
88
67
717
35
19
452
97
22
753
7
2
7
2
7
2
30
4
30
4
37.00
4.47
Total
500.00
0.25
X
500.00
0.25
1000.00
500.00
0.25
1000.00
44
22
507
298
80.19
1319
298.00
80.19
1319
7
2
7
2
8
2
6
2
30
4
30
4
30
4
30
4
27
4
37.00
4.47
37.00
4.47
37.00
4.47
37.00
4.47
38.00
4.47
33.00
4.47
814
147
0.9800
1116
302
3256
567
0.9800
4420
1164
1295
195
0.9800
1695
400
3589
454
0.9800
4521
932
1628
238
0.9800
2117
489
3,525.78
11324
1421
0.9800
14243
2919
9834
1410
0.9800
12730
2896
0.9800
0.9800
0.9800
0.9800
0.9800
0.98
0.9800
0.9800
4,015,000
16,060,000
6,387,500
17,702,500
8,030,000
54,385,000.00
54,385,000
54,385,000
22,403
37,789
22,403
4,097,594
44,805
145,443
44,805
16,295,053
28,257
49,949
28,257
6,493,963
47,041
116,542
47,041
17,913,123
31,682
61,090
31,682
8,154,454
190,732.28
440,722.41
190,732.28
55,207,186.98
82,451
364,907
82,451
54,914,809
82,451
361,990
82,451
54,911,892
Microwave Inventory Case
Intelligent Microwaves, Inc. (IMI) produces a wide range of personal and commercial
microwaves, including a heavy-duty microwave oven for use in restaurants and other
heavy use environments. Their microwaves are considered to be very reliable and have
many “intelligent” features that customers appreciate. Recently, however, competitive
price pressures have cut into IMI’s profit margins and they are taking a look at their
operations to try to find ways to reduce cost while maintaining or improving product
quality and customer service. You have been asked to look at their production and
distribution of their heavy-duty microwave oven.
IMI actually produces 6 models of the heavy-duty microwave but they are essentially the
same except for the power supply and the language of the instructions that are on the
microwave. These differentiating features result in the 6 models and are necessary to
meet the requirements of different overseas customers. IMI has always produced each
microwave model in batches large enough to satisfy one month’s worth (30 days) of
average demand. Historical records indicate it takes them on average 30 days, with a
standard deviation of 4 days to produce a batch and an average of 7 days, with a
standard deviation of 2 days, to ship a batch of microwaves to the appropriate warehouse
in the appropriate country. There is a setup cost of $1000 to get the production line
prepared to produce any of the heavy-duty models. One microwave of any model is
valued at $500. Through trial and error over the last few years, IMI has found that using
a reorder point of 51 days of supply (51 times the average daily demand) has given them
a reliable performance, only running out of microwaves about 2% of the time while
waiting for a new shipment to arrive. IMI uses an inventory carrying charge of $.25 per
dollar of inventory per year.
You are to do the following:
1. Calculate the current cost of IMI’s inventory practices using the CURRENT tab of the template
provided. (10 points)
2. What would be the potential benefits of selecting both the production batch sizes and the reorder
points more scientifically? Do this by completing columns B through H of the ANALYSIS tab of
the template provided. Using the concepts of Economic Order Quantity and Reorder Point,
explain the difference between this model and IMI’s current practice. (20 points)
3. What if IMI was able to fully standardize the heavy-duty model to the point where the language
and power supply customizing features could be added in a modular fashion immediately before
shipping to the warehouse that needs them? You consulted with the production superintendent,
who indicated that this could be done, but that it would add one day to the ship time to add these
customizing features to the standard microwave just prior to shipping.
Consider it this way. IMI maintains a warehouse right next to their factory and they store
inventory for models A, B, C, D, E, and F. Therefore they have to maintain separate inventory
for each of the models. If they standardize to a single model, it may take them a day to ship, but
they only need to keep one type of microwave in their warehouse.
For this part use the SINGLE MODEL column of the ANALYSIS tab and consider the impact
RISK POOLING has should IMI combine all models. Using the inventory concepts we discussed
in class, explain to IMI why they might achieve some cost benefit by embracing the idea of
replacing all of their models with a single model. (20 points)
4. Assuming that you have now convinced IMI to standardize on a single model of microwave,
investi …
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