FASTO, a cold formed bolt supplier to the automobile industry, sells about 5,000 bolts of a certain
FASTO, a cold formed bolt supplier to the automobile industry, sells about 5,000 bolts of a certain type each month. Different types of bolts are manufactured alternately at the same machines and each bolt costs about £10 in manufacturing. The company assumes an annual holding cost rate of 24 percent (including physical holding cost and cost of capital) and the fixed setup cost incurred when changing from one type of bolt to the other is £1280. Currently, FASTO manufactures bolts in batches of 15,000 units to keep setup losses low. However, as the new operations manager, you are supposed to revaluate the efficiency of the current replenishment policy.
i. Given the current replenishment policy, what are the annual holding and setup costs for FASTO?
ii. If FASTO aims to minimize annual holding and setup costs, what batch size do you recommend and by how much would the total annual cost change?
Recently, FASTO launched a new lean management initiative inspired by the success of the Toyota Production System. Following the just-in-time (JIT) concept, FASTO is considering limiting batch sizes for its bolts to 800 units per type. You are expected to analyse the proposal before any changes are being implemented.
iii. Drawing on the notion of waste, summaries the idea of the just-in-time (JIT) concept?
iv. Would you recommend FASTO to reduce its batch sizes to 800 units per type? Support your recommendation by an analysis and explanation of the implications. v. What other actions could the company take to lower its inventory?