Malti Venkatesan was sitting at her desk considering a perplexing problem. She was supposed to meet with Amar Dev Sahasane, her operations manager at EXCEL Corp., and discuss her ideas for curbing production costs. As a post-graduate of procurement management course, Venkatesan had thought of many avenues to cut costs. July 15, 2018 was her first general meeting since she had joined the company 14 days earlier. For six days, she had been crunching numbers, trying to find some new way through the techniques she had learned at business school. Though the task at hand had seemed very simple to her when it was assigned, it was only during these last few days that she had come to understand the real implications of various trade-offs. Venkatesan was now worried that this seemingly straightforward task could result in significant profit or loss for EXCEL Corp.

COMPANY BACKGROUND 

EXCEL Corp. (EXCEL) was a mid-sized manufacturer and distributor of domestic electrical appliances, catering primarily to the price-sensitive rural population in India. The firm operated two medium-sized facilities in a remote district in Saurashtra, a relatively undeveloped region in Gujarat, one of India’s most progressive states. Rather than compete with large-scale operations prevalent in the industry, EXCEL preferred to focus on the rural segment. Management believed there was more scope for success within this region of the market and in the past, this belief had been proven right. EXCEL’s manufacturing units had been in operation since 1984. Currently, the company had annual sales of Rs. 6,000,000 and had about 30 employees.

EXCEL manufactured a wide range of electrical appliances for household use, including television signal boosters, transformers, FM radio kits, electronic ballasts, battery chargers, voltage regulators etc. The company’s broad range of products catered to rural, low-income customers in and around the district.

BACKGROUND OF THE PROBLEM

Venkatesan was assigned the task of preparing the operating plan for the next eight weeks for the product P0110, which was a regular order. P0110 was an assembly of two P0X units and two P0Y units. Each P0X units required four P1X1 units and three P1X2 units. The final product had a unit price of Rs. 200. When Venkatesan checked the store inventory, she found 240 P0110 units already in stock. The requirement for the first week was just 400, which was easily manageable based on the current stock. However, the basic problem Venkatesan faced was not deciding how much to produce to be able to meet the requirements, but deciding how to produce economically, taking into account the forecasted demands of the product. Venkatesan knew that in order to decide, she would have to depend on some techniques and systems that she had learned as a business student. 

BILL OF MATERIALS

Venkatesan prepared the bill of materials, which was a relatively simple task as there were only two components in level 1 and two more in level 2. The final product at the top of the structure is always levelled zero. The level number increases as we move down the product structure. The final product P0110 has three levels of assembly. (see Exhibit 1). As P0110 was a regular product, she did not have to worry about the design aspect. She knew that one unit of P0110 required an assembly of two P0X units and two P0Y units. Each P0X was in turn, was assembled by putting together four units of P1X1 and three units of P1X2.

EXHIBIT 1: BILL OF MATERIALS

ITEM NO	PART NO	QTY	LEVEL	LEAD TIME	ON HAND INVENTORY
1	P0110	1	0	2	240
2	P0X	2	1	1	500
3	P0Y	2	1	1	340
4	P1X1	4	2	1	500
5	P1X2	3	2	1	600

MASTER SCHEDULE

After clearly outlining the product cost structure, the next job at hand for Venkatesan was to prepare the master schedule. This schedule would indicate the number of P0110 units required to be assembled for the next eight weeks. By following the pattern set in earlier master schedules and studying market demand forecasts in detail, Venkatesan was able to finalize a master schedule (see Exhibit 2).

EXHIBIT 2: MASTER SCHEDULE

WEEK	1	2	3	4	5	6	7	8
REQUIREMENTS	400	350	300	450	300	450	225	525

 

ON HAND INVENTORY

EXCEL had witnessed a significant decrease in sales owing to a number of factors that had occurred just before Venkatesan joined the company. This was reflected in higher-than-normal levels of on-hand inventory. As a student of Inventory management, Venkatesan was able to relate this element of the problem. She decided to align the on-hand inventory with the demand forecast and develop the method needed to optimize production (see Exhibit 3)

EXHIBIT 3: ON-HAND INVENTORY

ITEM	INVENTORY
P0110	240
P0X	500
P0Y	340
P1X1	500
P1X2	600

 

COSTS ASSOCIATED

With very little time at her disposal, Venkatesan could not calculate the optimum carrying or set-up costs. She instead went to the accounts department and collected records of the current inventory carrying and set-up costs (see Exhibit 4) 

EXHIBIT 4: COSTS ASSOCIATED

ITEM	COST PER UNIT(Rs.)	SET UP COST(Rs.)
P0110	200	500
P0X	65	400
P0Y	35	350
P1X1	05	430
P1X2	15	400

 

Inventory carrying cost = 0.5 percent

1. Help Malti Venkatesan decide the total cost of P0110 units by using lot for lot technique.
2. What is the effect on the cost of P0110 units if economic order quantity technique is applied instead of lot for lot?
3. Evaluate the lot size by using least unit cost technique?
4. Prepare the MRP matrix for P0110 and P0X units?

Answer rating: 100% (QA)

1 Total cost of P0110 units using the lotforlot technique The lotforlot technique means producing exactly what is needed to fulfill the demand In this case we will produce the required quantity for ea... View the full answer