The Viable System Model - Assignment Example

Management Decision Support Part The model that best applies to my case here is the Viable System Model. As the model explains, this is a system which works on the meeting the demands of the surviving the changing environment. The Viable systems model is defined as, “A model of the organisational structure of any viable or autonomous system. A viable system is any system organised in such a way as to meet the demands of surviving in the changing environment” (Babylon, 2010). The main focus of this model is the ability to adapt to the changing environment and to be able to perform well through all the issues and changes. Here I feel that this has been one of my weaknesses in the course. I have had issues in being able to adapt to the changing environment and have been through a lot of stress for the course. I think this has been one of the biggest issues and reasons for not being able to perform well in the course. The model hence fits my profile well. By applying the viable systems model, I have learnt that it is necessary for any organization to quickly adapt to the changing circumstances and market conditions. It is essential to structure or manage any organization from the beginning in such a way that it meets the demands to at least survive in a changing environment. Similarly it is essential to plan and organize one’s time and schedule, so that the person is able to cater to the basic requirements that are demanded from him. In terms of the points that need to be changed here, I feel I need to improve my communication and overall approach to the course and work towards the course with a more open mind. I need to remove the blocks of my mind for the difficulties of the course and work towards learning the concepts and the basis of the course to a greater extent. In short I need to improve my foundation for this course. Part 2: “All-for-Kids” retails everything that parents need for children. They are trying to work out what their stock-ordering policy should be for their “Supersorb” disposable nappies. They are sold in packs of 24 at a price of £3.50 per pack. They purchase the packs from their suppliers at a wholesale cost of £2.50 per pack. Sales are, on average, 300 per week and the shop is open for 51 weeks of the year. The fixed costs of re-ordering and delivery have been estimated at £30 per delivery. The costs of holding stock are 15% per annum of the value of the stock, plus the rental of the storage space, which is £100 per square foot per year. A pack of nappies takes up 1.5 square feet of floor space, but 15 packs can be stored on top of each other. It can be assumed that, as stocks run down, the vacated floor area can be used for other purposes, thus costs do not have to be included for some maximum area exclusively reserved for nappies. i. What is the annual holding cost per pack per year? What fraction of this is due to storage costs? Annual holding cost = 15 % per annum of the pack value + (1.5 sq. ft * £ 100 / 15) = 15 % of £ 2.50 + £ 10 = £ 0.375 + £ 10 = £ 10.38 Storage costs amounts to about 96.34 % (£ 10 / £ 10.38) of the total holding cost per pack per annum. ii. What is the optimal order quantity and how many days should there be between orders (Assume 6 working days in a week). Optimal Order Quantity = √ (2 * D * S / H) (Slack, Chambers, Johnston, & Betts, 2006 ) where D = Demand per time period S = Order Cost H = Holding cost per stock unit per year Annual demand D = 300 packs per week * 51 weeks = 15,300 packs Order Cost S = £ 30 per delivery Holding Cost H = £ 10.38 per pack per annum Optimal Order Quantity = √ (2 * 15,300 * 30 / 10.38) = 298 packs per order Number of orders = 15,300 / 298 = 52 orders Number of working days = 51 * 6 = 306 days Days between orders = 306 / 52 = 5.88 days  6 days iii. What assumptions did you have to make in (ii)? How realistic do you think they are in this case? A number of assumptions were made in the calculation of the optimal order quantity. These include: 1. The ordering cost each time is assumed to be constant (£ 30 per order). 2. The demand is assumed to be constant for the entire one year period (300 packs per week). 3. The purchase price (£ 2.50) is assumed to be constant. 4. The time taken to supply (lead time) is assumed to be constant. 5. It is assumed that the stock is replenished immediately. It is essential to identify any assumption that is not realistic in this case. There are a number of factors that need to be taken into account in order to rely on the optimal order quantity. It is possible that there are variations in the order cost due to inflation, increased transportation costs and market growth. It is imperative to note that the demand can vary significantly over the year due to seasonal factors, new entrants into the industry and promotional activities. The suppliers can choose to increase the price due to inflation. In certain cases, the lead time might also vary depending on the transport conditions. The reliability on the economic order quantity depends on these factors. iv. “All-for-Kids” is considering installing some specialized handling equipment at its warehouse for these very bulky nappies. This would reduce the cost of a delivery to £20 but would cost £120,000. If the company has 120 shops similar to the one considered in this question, how many years will it take for the new equipment to pay for itself? Would you recommend that they buy this new equipment? Assuming that the company orders the optimal order quantity at all times, initially, the total cost of delivery is given as Total cost on delivery = 52 orders * £ 30 * 120 stores = £ 187,200 When the order cost changes to £ 20, the optimal order quantity becomes EOQ = √ (2 * 15,300 * 20 / 10.38) = 243 packs per store Number of orders = 15,300 / 243 = 63 orders per store The new total cost on delivery = 63 orders * £ 20 * 120 stores = £ 151,200 In one year, the savings amount to £ 36,000 (£ 187,200 - £ 151,200). Number of years to break even = £ 120,000 / £ 36,000 = 3.33 years Hence, it will take 3.33 years for the equipment to pay for itself. It is recommended that the company buys this new equipment, as the break even time is relatively lesser and the additional storage space saved could be used for storing other products. v. “All-for-Kids” supplier introduces a new pricing structure. Discounts are available for bulk purchases, but “All-for-Kids” operate a decentralized policy in which every shop has to keep its accounts separately. Each shop manager is therefore given the following schedule for purchase of “SuperSorb”. Quantity Price 1-499 £ 2.50 500-999 £ 2.45 1000-1999 £ 2.40 2000&over £ 2.35 What quantity should the store manager order? Total Cost when the order quantity is at EOQ (298 packs) TC = PD + (HQ / 2) + (SD / Q) (Slack, Chambers, Johnston, & Betts, 2006 ) = (£ 2.50 * 15,300) + (£ 10.38 * 298 / 2) + (£ 30 * 15,300 / 298) = £ 41,337 The total costs when the order quantities are higher are computed as shown below: 1. When Q = 500 TC = PD + (HQ / 2) + (SD / Q) = (£ 2.45 * 15,300) + [(10 + 15% of £ 2.45) * 500 / 2)] + (£ 30 * 15,300 / 500) = £ 40,995 2. When Q = 1,000 TC = PD + (HQ / 2) + (SD / Q) = (£ 2.40 * 15,300) + [(10 + 15% of £ 2.40) * 1,000 / 2)] + (£ 30 * 15,300 / 1,000) = £ 40,995 3. When Q = 2,000 TC = PD + (HQ / 2) + (SD / Q) = (£ 2.35 * 15,300) + [(10 + 15% of £ 2.35) * 2,000 / 2)] + (£ 30 * 15,300 / 2,000) = £ 46,537 It is evident that the total cost reduces when the quantity discounts are utilized. The total cost is the minimum when the quantity ordered is 2,000 packs. Hence the shop manager should order 2,000 packs in a single delivery. Bibliography Babylon, 2010, ‘Definition of Viable system model’, Accessed on 19th August 2010, Retrieved from http://dictionary.babylon.com/viable%20system%20model/ Slack, N., Chambers, S., Johnston, R., & Betts, A. (2006). Operations and Process Management: Principles and Practice for Strategic Impact. Prentice Hall. Read More