Reference no: EM131068465

Again Agame

George Heller is an inventory planner for the Again Agame Company (AA).  His job is to provide a sufficient number of component parts to permit the final assembly department to collate and package any of the parlor games in AA's product line to meet the customer orders each week.  George has been a planner only a short period of time and is currently evaluating his procedures for ordering component parts in order to improve his performance.  In the back of his mind was the knowledge that no less than three people had held this job during the past two years, and all three had left the company.

The Process for Producing Parlor Games

The production process for producing parlor games at AA includes two departments:  fabrication and assembly.  The company has the facilities for fabricating some of the game parts, such as plastic men, game markers, special indicators and the like.  The firm also prints their own game boards and box covers.  Other pieces like marbles and dice are purchased from outside suppliers.  The company maintains an inventory of all of these components in order to provide the assembly foreman, Larry Cszonka, complete flexibility in scheduling the assembly line.  George Hellar is responsible for controlling the inventories of the fabricated parts.

The assembly department consists of a single assembly line.  The company maintains no inventory of finished goods, but produces to order.  Larry Cszonka schedules for final assembly the highest priority orders each week.  The pieces are collated, counted and packaged on the assembly line.  In addition, the game board and packaged pieces are inserted into a game box and the completed games are packed for shipping on the line.  Larry schedules the line one week at a time and withdraws the inventory for the week's assembly schedule as needed by the stations on the line during the week.  Sometimes several games are assembled in a single week.

The general product structure for a parlor game is shown in Exhibit 1 and the production flow between the fabrication and assembly departments at AA is shown in Exhibit 2.

Controlling Component Inventories

George Heller reviews his inventory position for each item every Monday morning, and immediately transmits any orders to the fabrication shop for the production of replacement inventory.  George reviews his inventory at 8:00 am on Monday morning since the material handlers put the preceding week's production of component parts into inventory over the weekend.  As soon as he finished the inventory review he places the replenishment orders on the shop.  The production lead time is exactly one week for the orders sent to the fabrication shop.

In order to improve his procedures for controlling the component part inventory, George decided to study a single component is some detail.. He selected a special toy cup that was used in several of the company's products.  Some of the parlor games require only a single toy cup, but other games required several cups per game.  The demand for this item averaged about 20 cups per week over the last two years.

This case was prepared by Professor W. L. Berry and D. C. Whybark of the Krannert Graduate School of Industrial Administration, Purdue University, West Lafayette, Indiana.  It is intended for classroom discussion only.

In order to complete his analysis he gathered data on the costs relevant to the production and storage of the cup.  George learned from the firm's accountant that the inventory carrying cost is $.10 per week per cup.  (This cost is assessed on the Friday night inventory balance).  The machine set-up cost for the cup is $9.  Furthermore, any inventory shortages cost $1 per cup since incomplete games cannot be sold and customer orders are not backordered.  The $1 represents the foregone profit and goodwill from the lost customer orders.

Finally, George designed the form shown in Exhibit 3 to help him in deciding how much and when to order replenishment inventory for the special cup.  He had 44 units in inventory on the Monday morning that he began his study.

As his goal was to minimize total costs, he decided to use the past demand to calculate the Economic Order Quantity (EOQ), Re-Order Point (ROP), and Safety Stock levels.  AA management requires a 95% customer service level.   

EOQ = √(2(Demand)(Order or Setup Cost)/Holding Cost)

ROP = Demand * Lead Time + Safety Stock

Safety Stock = z * Standard Deviation of demand (in this case use z for 95% service level)

1. Calculate the ROP, EOQ and Safety Stock (uses historical demand).  Attach the simulation spreadsheet and show all of your formulas and calculations. 

a. What is the economic order quantity (EOQ)?

b. What is the reorder point (ROP)?  In which weeks should orders be placed?

c. What should be the level of Safety Stock?

d. Using the simulation spreadsheet, what is the total cost for this solution?

If George knows the future demand the solution is quite different.  Knowing the future demand, it is possible to find the optimum answer rather than relying on statistical solutions using historical demand.

2. Assume the demand for the next 10 weeks will be as follows. 

Week	1	2	3	4	5	6	7	8	9	10
Demand	44	2	9	42	46	3	30	9	45	49

 

 

Using trial and error simulation of various order quantities and weeks, find the optimum solution.  Submit your completed spreadsheet with itemized costs (Optimum solution is less than $50 total cost).

Following is an example of what you need to do (Note - it is not a good solution).

Week Number	1	2	3	4	5	6	7	8	9	10
Monday Morning Inventory	44	10	8	50	108	62	59	29	20	50
Week's Demand (Simulated)	44	2	9	42	46	3	30	9	45	49
Friday Night Inventory	0	8	0	8	62	59	29	20	0	1
Number Ordered	10		50	100					50
Setup Costs ($9 per order)	9	0	9	9	0	0	0	0	9	0
Inventory Costs ($0.10 unit / week)	0	0.8	0	0.8	6.2	5.9	2.9	2	0	0.1
Shortage Costs ($1.00 / unit)	0	0	1	0	0	0	0	0	25	0
Total Costs for Week	9	0.8	10	9.8	6.2	5.9	2.9	2	34	0.1
Cumulative Cost from Last Week		9	9.8	19.8	29.6	35.8	41.7	44.6	46.6	80.6
Total Costs	9	9.8	19.8	29.6	35.8	41.7	44.6	46.6	80.6	80.7

Attachment:- Assignment.rar