A company produces advanced robotic devices for laboratories and other environments having stringent requirements for contamination avoidance
Question:
A company produces advanced robotic devices for laboratories and other environments having stringent requirements for contamination avoidance and protection. The devices are coated in a specialized material that resists the accumulation of contaminants and does not itself contaminate any fluids that contact it. The company’s small manufacturing facility consumes 1 000 liters of this coating material evenly over each year and it can order any quantity from the material producer in multiples of 10 liters, with a promised lead time of 2 weeks between placing the order and receiving the material. The company currently orders in quantities of 40 liters. It costs the company £50 to place each order, and it costs £21 per liter per annum to store it before it is used. But the material degrades in storage and has to be discarded if stored for more than 3 weeks.
The robot manufacturer coats the devices in batches, with each batch consisting of a single type of device. When setting up to produce a batch the coating sequence has to be determined and the equipment configured correctly, and this costs £65 for each setup. The demand for devices is 370 per year, and the coating facility can operate at a production rate of 800 per year. The cost of storing coated devices is £15 per item per year for insurance plus £5 per item per year for all other storage-related costs.
a) Explain the fundamental reason why organizations store inventory, identify the different types of inventory that organizations store, and suggest (with a brief explanation) which type of inventory applies to the storage of coating material by the robotics manufacturer. Then think of some service operation with which you are familiar (for example a local retailer), name and describe this operation in a single sentence, and identify or conjecture a particular example of the same kind of inventory as the one you have just suggested.
b) Explain what the term ‘economic order quantity’ means and briefly explain in non-mathematical language how it is derived. Then calculate the economic order quantity for the coating material to the nearest feasible value and indicate whether this would lead to the discarding of any degraded material.
c) Calculate how much money the company would save by ordering at the economic order quantity, ignoring any discarding of degraded material, and how much it could save by ordering at the maximum order quantity that would not involve discarding. Then think of some service operation with which you are familiar (it could be one you thought of earlier), name this operation, identify an inventory it holds that you think will be significantly discarded, and identify the main reason why the operation cannot store exactly how much it needs.
d) Find the economic batch quantity for the coating application facility. Then briefly explain non-mathematically why the EBQ formula differs in the way it does from the EOQ formula.
In practice, although the coating material producer promises a 2-week lead time, this tends to fluctuate. There are also fluctuations in the precise quantity of coating used on each device, and the number of devices produced in any given period.
e) Explain what is meant by ‘lead time usage’ and, explain how the risk of a stock-out in the coating material is related to both the frequency distribution over lead-time usage and the reorder level. Then think of some service operation with which you are familiar (it could be one you thought of earlier), and for one of its main items of inventory identify the consequences of a stock-out.
Managerial economics
ISBN: 978-1118041581
7th edition
Authors: william f. samuelson stephen g. marks