PRJ_9_ABC part production (Inventory Problem) Managers at ABC are reviewing the economic feasibility of producing a part that the company is currently purchasing from a supplier. The projected annual demand for the part is 3200 units. Company ABC operates 250 days per year. ABC's financial analysts have determined a 14% cost of capital for the use of funds for internal investments. In addition, an average of $600,000 was invested in the company's inventory last year. Accounting information shows that a total of $24000 was spent on taxes and insurance related to the company's inventory. An estimated $9,000 was lost due to inventory shrinkage, which included theft as well as damaged goods. The remaining $15000 was spent on warehouse overheads, including utilities for heating and lighting. An analysis of the purchasing process shows that approximately two hours are required to process and coordinate an order for parts, regardless of the quantity ordered. Including employee benefits, purchasing salaries averaged \$28 per hour. A detailed analysis of 125 orders also showed that $2,375 was spent on telephone, paper and postage costs directly related to the order process. A lead time of one week is required to obtain the part from the supplier. Demand during the lead time is approximately normally distributed with a mean of 64 units and a standard deviation of 10 units. Service level guidelines state that it is acceptable to stock up once a year. Currently, the company has a contract to purchase the part from the supplier at $18 per unit. However, in the past few months, the company's production capacity has been expanded. As a result, there is now excess capacity in certain production departments and the company is considering the possibility of producing the parts itself. The forced utilisation of the equipment indicates that production capacity will be available for the part in question. Production capacity is available at a rate of 1000 units per month with a production lead time of up to five months. Management believes that with a lead time of two weeks, the schemes can be organised so that the part can be produced when needed. Demand during the two-week lead time is approximately normally distributed with a mean of 128 units and a standard deviation of 20 units. The exception is that production costs are $17 per part. One concern of management is that set-up costs are significant. Total labour costs and lost production time are estimated at $50 per hour, and it would take a full eight-hour shift to set up the equipment to produce the part. Develop a report for ABC management to address the question of whether the company should continue to purchase the part from the supplier or start producing the part itself. Include the following factors in your report. 1. An analysis of the costs of retaining the part, including the appropriate annual retention cost rate. 2. An analysis of order costs, including the appropriate cost per order from the supplier. 3. An analysis of installation costs for the production operation. 4. Development of an inventory policy for the following two alternatives a. Order a fixed quantity of Q from the supplier b. Ordering a fixed quantity of Q from in-plant production 5. Policies in parts 4a and 4b should include a. Q b. Number of orders or productions per year c. Cycle time d. Reorder point e. Safety stock quantity f. Maximum expected inventory g. Average inventory h. Annual holding cost i. Annual order cost j. Annual cost of units purchased from those produced k. Total annual cost of purchasing policy and total annual cost of production policy 6. Make a recommendation as to whether the company should purchase or manufacture the part. What savings are associated with your recommendation compared to the alternative