What is the appropriate re-order point

Discuss the below:

Q1. A small steel fabricator uses (among other supplies) plates of steel to manufacture prototypes for various small toy companies (think Tonka) and a wide variety of other items. All production planning is handled on a make to order basis - finished goods inventory is not held. The steel may be purchased in 12"x12" sheets that weigh 0.9792 pounds and have a cutting tolerance (along each side) of ± 0.25". Each such sheet of steel costs $8.00. The cost to order steel sheets is estimated to be $100 per order. The manufacturer works 50 weeks a year and the lead time for an order is 1 week. The annual cost to hold a square foot of steel is estimated to be 20% of the price. Annual demand for the steel is the equivalent of 5,000 12"x12" sheets. Assume a lead time service level of 75% is acceptable and the standard deviation of weekly demand is 50 sheets. (For parts a - c assume a fixed quantity model is used.)

a. What is the optimal order quantity?

b. What is the appropriate re-order point?

c. How long (in weeks) is the average order cycle?

d. If a fixed interval of ten weeks is used, what would be the stocking level and safety stock for a 75% service level.

A. Assume that you work in a supplier development role for a major clothing designer (such as one that recently made a big PR mistake by sourcing, from Chinese suppliers, clothing to be worn by US Olympic athletes in London). The company has decided that, regardless of past sourcing practices, there is a need for a company owned facility that will make prototypes of new designs in small volumes and be sufficiently scalable to make "uniforms" for the US Olympic teams in the US. You have been asked to establish this new facility. Describe your likely decisions in regard to:

a) Structural decisions (process choices, location, layout, capacity).

b) Infrastructural decisions (master scheduling approach, material planning, detailed scheduling and control, quality control, workforce management and supervision.)

Q1) The sheet steel described in Part I (above) may also be purchased in 12"x24" sheets that weigh 1.9584 pounds and have a cutting tolerance (along the each side) of ± 0.25". These larger sheets cost $15.00. The company's equipment is no more effective and no less effective when using the larger sheets rather than the 12"x12" sheets. However, to reduce setups, if 12"x24" sheets are purchased they are routed to a secondary supplier where they are cut down to the 12"x12" size at a cost of $0.50 per cut. The secondary supplier has a minimum order of 1250 cuts. This approach, with an intermediate supplier, increases the lead time to two weeks. Assuming a fixed quantity model is used:

a. Does this second option result in a new optimal order quantity (or would you stick with the quantity from Part I)?

b. What is the new re-order point.

c. How much extra safety stock is required with this second supply approach?

Q2) A control study of the cutting operation of the intermediate supplier (described in part IV question 1, above) has demonstrated that it provides sheets with an average length of 11.87" and a standard deviation of .05". By contrast, sheets purchased from the original supplier (described in part I above) are found to average 11.970" with a standard deviation of 0.06". Sheets that do not meet specifications are sold as scrap for an average price of $0.05 per pound.

a. Determine Cp and Cpk for the original supplier (purchasing 12"x12").

b. Determine Cp and Cpk for the second supply approach (with the intermediate step).

c. How many 12"x12" sheets of steel would be lost to scrap with each approach to supply?

d. Including the recovered value from recycling, what would the loss due to defective sheets under each scenario?

e. Assume you have no ability to influence the practice of either supplier (i.e., this is simply transaction based and not relationship based). Which approach to purchasing would minimize total costs of inventory (including quality losses)?

f. Which supplier would you prefer? Why?

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Operation Management: What is the appropriate re-order point
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