NSU MGT 314 (Supply Chain/ Production Management), Few Questions and answers
Q-1: The purchasing agent for a company that assembles and sells air-conditioning equipment in a Latin American country noted that the cost of compressors has increased significantly each time they have been reordered. The company uses an EOQ model to determine order size. What are the implications of this price escalation with respect to order size? What factors other than price must be taken into consideration? *
According to the book of operation management (William J. Stevenson), “EOQ models answer the question of how much to order, but not the question of when to reorder point (ROP) When order.” According to my logic, there could be multiple reasons. The first one could be frequent ordering in a short time, putting pressure on suppliers. So, to keep a balance between supply and demand, the suppliers charging higher in each next order. Because every supplier has a limited capacity, increasing capacity in a short time is not easy and most of the time so costly.
The second reason could be an increase in transportation costs due to different sizes or variations. The product compressor is also a sensitive component, so due to size or variation, carrying charge could increase can be expected too.
Rather than following price factors in consideration only, the agent needs to consider other factors like transportation, supplier capabilities and other external factors when making an order.
Q-2. To be competitive, many fast-food chains began to expand their menus to include a wider range of foods. Although contributing to competitiveness, this has added to the complexity of operations, including inventory management. Specifically, in what ways does the expansion of menu offerings create problems for inventory management?
As the customers are the key sources of revenue for any business, keeping a wider range of choice, create good competitive advantages to attract more customers for a business like a fast-food chain. But everything comes with a cost. Like fast food, most of their raw materials would be quickly perishable like fish, meat, vegetables, fruits, and a variety of goods. And expanding the menu always creates more variability in terms of inventory.
As an example, we all know about the Bangladeshi biggest fast-food kebab chain Baba-Rafi. They offer only a few menu items and mostly based on beef and chicken so that their inventory manager needs to focus on only three-four raw materials. If tomorrow they want to hundreds of different menus like fresh juice, fresh salad, coffee, cookies, oatmeal, biriyani, fuckhka etc, which raw materials are not related to their current product that will create the problem.
Now they serve kebab and beef-related food, which packaging is simple paper-based bags, and one machine for beef kebab. If they start selling juice and coffee today, they’ll need to order cups, packing machines, and a juice maker machine to serve the juice. And to serve coffee, they’ll have to buy different cups, different machines and also different raw materials than serving juice required.
Baba Rafi will face lots of difficulties not only to manage their inventory but also to serve the customers on time. But also, hiring the right people to cook, getting quality raw materials, product packaging for a variety of goods, managing different types of machinery on time will make the operation difficult. Also, it will create a higher lead time for inventory restocking because you can’t be able to manage all the raw materials from one supplier.
But, if Baba rafi wants to expand its menu with goat kebab, fish kebab, etc related to kebab, they don’t have to face difficulties in the operation because even some raw materials are different, but the processing and required machinery are the same.
Q-3. Identify the term being described for each of the following: (a). A sequence of activities in a project. (b). The longest time sequence of activities in a project. (c). Used when two activities have the same starting and finishing points. (d). The difference in time length of any path and the critical path. (e). The statistical distribution used to describe variability of an activity time. (f). The statistical distribution used to describe path variability. (g). Shortening an activity by allocating additional resources. *
A sequence of activities in a project: Path
The longest time sequence of activities in a project: Critical Path
Used when two activities have the same starting and finishing points: Dummy Path
The difference in time length of any path and the critical path: Slack time
The statistical distribution used to describe variability of an activity time: Beta Distribution
The statistical distribution used to describe path variability: Normal Distribution
Shortening an activity by allocating additional resources: Crash
Q-4. What trade-offs are involved in ( a ) sharing information with other organizations in a supply chain and ( b ) the acquisition of information-processing technology? *
To run a business efficiently, it’s important to count everything because counting helps to make the right decision. Because if you know, there’s a hole in your path, you can avoid it easily. Otherwise, you just have to depend on luck.
( a ) sharing information with other organizations in a supply chain:
Sharing information might help the supplier to optimize the lead time by ordering the products at the right time. Because if an organization shares its information and gives an update about its inventory frequently, the supplier can prepare or manufacture the product at the right time to cut off the lead time.
On the other hand, as a result of fluent information sharing from time to time, the organization can minimize their inventory cost because the supplier knows when you need it. It’s much more efficient because you’re minimizing your inventory without sacrificing customer convenience. Cause you’re getting it at the right time.
If an organization has multiple suppliers, it becomes easy to manage all the raw materials by sharing information. Because every supplier knows when to supply and what to supply, it helps an organization to reduce costs as well.
Everything comes with a cost, sharing information with suppliers might give an organization so many benefits and also sometimes create problems. From my real-life experience, sometimes suppliers use that information in an unethical way. They can observe your business performance and external strategy to run the business. Which can be used by the supplier to increase your raw material or product price. Even sometimes, grabbing your customer base.
( b ) the acquisition of information-processing technology:
An integrated information processing technology can be a great deal for most of the business. From small to big, any organization can be benefitted by information technology not only to manage the inventory efficiently but also can create better convenience for customers because it helps to make an efficient decision and helps to predict uncertainty in the supply chain. Reducing uncertainty in the supply chain is not an easy task; it helps to sustain the business in the market.
Acquiring information technology also helps the employee to learn better how well they can design their supply chain facility without having an error. It helps to reduce “bullwhip-effect” in the supply chain too.
The acquisition of information-processing technology also comes with a cost. Because most of the time, used tools are made by 3rd parties. Providers of the tools or system can create a backdoor to steal valuable organization data, likes strategic, sales, customer, and a lot of confidential information.
Q-5. Why might a probabilistic estimate of a project’s completion time based solely on the variance of the critical path be misleading? Under what circumstances would it be acceptable? *
Predicting accurate activity time for a task isn’t practically feasible in most of the cases. So that, In real world scenario, the standard deviation is calculated based on average time as per usual linear function.
Q-6. Why do waiting lines form even though a service system is underloaded?
Waiting lines is the biggest challenge for service based business, waiting time leads to customer dissatisfaction. Waiting lines from and underloaded service system could be occur for factors like, a single counter working slower then other when there’s a multiple counter to complete the service, or the customer is asking for a service which is complex than usual. suppose you’ve went to a fast food shop to grab a pizza, you seat on your table, ordered pizza and you got your pizza in just time. But when you went to the cash counter you find-out no one is there and you wait for someone to pay the bill.
So, there can be waiting lines even if the system is underloaded in a service.
Q-7. Consider this situation: A manager is contemplating making changes to a single-server system that is expected to double the service rate, and still have just one server.
(a). Would you (intuitively) think that doubling the service rate of a single-server system would cut the average waiting time in line in half? (b). For the sake of analysis, suppose the current system has an arrival rate of 8 customers per hour and a service rate of 10 customers per hour. If the service rate is doubled, what impact will that have on the average number waiting in line? (c). What are some managerial implications of your analysis? *
Ans (a) As I always say, the benefit comes with a cost. If we’re doubling the service rate, it will be a good solution, but the cost will increase because of adding another server.
Since the requirement demands, we are going to double the service rate. When customers are to pay more, they expect service to be of more excellent. As stated increasing the service rate by only a little more than 14% would cut the average number
waiting in line, almost in half.
As a manager, when there is a demand, I would opt to utilise the demand and increase the service rate at the same
time give good quality service and would work out ways to completely utilise the server space.
I would definitely suggest implementing another server.
(b)
λ=8customers per hour
µ=10customers per hour
Lq=2μ(μ-λ)
=8210(10-8)
=6420
=3.2
Similarly when the service rate is doubled, the average number of customers waiting in the system is less than halves.
Lq=2μ(μ-λ)
=8220(20-8)
=64420
=0.267
The overall waiting line becomes less than halve.
(c)Ans: The managerial implications are that in order to reduce the waiting time in the overall system it is important to reduce the service rate. This will help to solve the customers faster and reduce the waiting time of the waiting customers.
Q-8. UPD Manufacturing produces a range of health care appliances for hospital as well as for home use. The company has experienced a steady demand for its products, which are highly regarded in the health care field. Recently the company has undertaken a review of its inventory ordering procedures as part of a larger effort to reduce costs. One of the company's products is a blood pressure testing kit. UPD manufactures all of the components for the kit in-house except for the digital display unit. The display units are ordered at six-week intervals from the supplier. This ordering system began about five years ago, because the supplier insisted on it. However, that supplier was bought out by another supplier about a year ago, and the six-week ordering requirement is no longer in place. Nonetheless, UPD has continued to use the six-week ordering policy. According to purchasing manager Tom Chambers, “Unless somebody can give me a reason for changing, I'm going to stick with what we've been doing. I don't have time to reinvent the wheel.”Further discussions with Tom revealed a cost of $32 to order and receive a shipment of display units from the supplier. The company assembles 89 kits a week. Also, information from Sara James, in Accounting, indicated a weekly carrying cost of $.08 for each display unit. The supplier has been quite reliable with deliveries; orders are received five working days after they are faxed to the supplier. Tom indicated that as far as he was concerned, lead-time variability is virtually nonexistent. Questions: (a). Would using an order interval other than every six weeks reduce costs? If so, what order interval would be best, and what order size would that involve? (b). Would you recommend changing to the optimal order interval? Explain. *
(a)To understand the order interval other than every six weeks reduce costs or not we need calculate the operation using EOQ and
Using FOI method
Time= 6 week, Number of kit= 89, Ordering cost = $32
Quantity ordered= (Number of kit * Demand for weeks) = 6*89 = 534
Weeks in a year = 52, Carrying cost= $0.8
Total annual cost for ordering= Total order cost + Total carrying cost
= (Number of order * Order Cost) + (Average Inventory*Annual Carrying Cost)
= (52/6 * $32) + (534/2 * $0.08 *52)
= 277.33 + 1110.72
= $1,388.05
EOQ Method:
Quantity Ordered = √ (2 * Annual Demand * Order Cost) / Annual Carrying Cost
= √ (2 * 52 * 89 * $32) / (0.08 * 52)
= 266.83 or 267
Total Annual Cost for ordering = Total Order Cost + Total Carrying Cost
= (Number of orders * Order Cost) + (Average Inventory * Annual Carrying Cost)
= (52 * 89) / 267 * $32 + (267/2) * $0.08 *52
= $ 1110.03
(b)The analysis is to changing to the optimal order interval and finding out the optimal policy of
ordering to minimize the order related cost.
A current order policies objective is to the economic order quantity is better or fixed order
quantity. Economic order quantity refers order once every 6 weeks and the other is 6 weeks
fixed order quantity.
Assuming total annual demand stands 52 weeks in a year which is (52 * 89) = 4628. Based on
this annual demand, the order cost $32, carrying cost $0.08 weekly. The economic order
quantity is found to be 267.
Now, the FOI is giving an annual cost for ordering stands at $1,388.05
The EOQ is giving an annual cost of ordering stands at $1110.03.
By using EOQ, ($1,388.05-$1110.03) = 278.02 can be saved annually.
So, the best course of action to minimize the cost is applying EOQ method.
And quantity ordered is 267.
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