Economic Order Quantities and Variations in Production Load - Assignment Example

?Q1: Explain the concept on which your research was based and the extent of its application. My research dealt with the considerations that governed the store layout and location of Ikea, the internationally renowned furniture manufacturer and retailer. Because of its hugely successful business particularly during the economic crisis when all its competitors have sustained losses, Ikea had become the focus of envy and even enmity. Critics of Ikea have denounced the company for taking undue advantage of its size in culling favours with local administrators, in forcing out established local businesses from prime locations within the locality. Consumer groups have also complained about the company’s store layout, which they suspect was deliberately intended to psychologically manipulate customers into impulsive buying. The research was based on the premise that both the layout and location of Ikea stores were indeed intentional, but only in so far as they serve the function of operations management to advance the strategic thrust of the firm. The strategic goal of Ikea is to provide quality furniture at reasonable cost; its target market includes people of all walks of life, particularly those who could not afford the high cost of conventional, ready-made furniture. Its product design employs knocked-down assembly type furniture which may be stored in compressed flat packs. The product design and manufacturing process are all intended to serve the principal philosophy behind Ikea – to reduce production costs while maintaining quality, and engaging the customer in the production process by leaving the assembly of the furniture to them. The location and layout of Ikea stores are but an extension of the production strategy. The flat pack design of the furniture assembly kits enables their storage in compressed areas; a system that facilitates quick location and identification of particular products supports the warehouse-type storage area adjacent to the show area. The store layout is consistent with the firm’s self-service philosophy, so customers decide on their choice of purchases in the show area and locate their own goods in the storage area. As mentioned in the report, the principal complaint of consumer groups is that Ikea’s layout forces customers to go through their entire display and entices them to make impulse purchases against their intentions. Research fails to substantiate this allegation, however. Customers who do not wish to buy anything are certainly not forced or intimidated into doing so. It just happens that visitors to Ikea usually find something else that they decided they needed or wanted. The layout therefore facilitates customers’ view of Ikea products to enable them to find what they may not have intended to purchase at the beginning, but which they considered they wanted to buy anyway. The layout helps customers decide what to purchase, it does not compel them to purchase – at least, not any more than any other store that markets retail merchandise. In the choice of location, principles of operations management require the consideration of the following factors: adequacy of market potential, accessibility to customers, potential for growth, business interception, attraction to customers, compatibility with surroundings, minimisation of competition, and site economics. Of these, the principal complaint of competitors has to do with the minimisation of competition. That this has been accomplished by Ikea’s entry into the locality is not disputed; the question is, whether it has been done ethically or not. Whether unethical practices were employed in getting local administrators to permit Ikea to open at their locations is not supported by proof, and to decide in this direction is prejudicial not only to the company but moreso to the local authorities. As far as the research uncovered, Ikea’s location in the locality afforded the immediate community or city significant advantages in terms of employment and access to reasonably priced goods and services. The location of Ikea’s superstores in a certain locality would tend to spur the local economy and generate tax collections to support the local government budget, thereby leading to improved public services. There is thus little doubt that authorities who approved establishment of Ikea stores in their cities or communities had the best interests of their constituency in mind. While companies may often have hidden agendas in designing their store layout and choosing their locations, in the case of Ikea, this does not appear to be the case. Data shows that it has a mutually beneficial relationship with the community. All companies try to create a layout that encourages customers to buy from their displays by showing them the outstanding qualities of their products, not by forcing them through psychological pressure. From the research, there also appears to be no proof that Ikea customers were forced to buy things that they did not want to buy. The purchase choice still remained entirely with the customer. In effect, Ikea had done only what other companies would have done: it employed location and layout to its advantage in the furtherance of its marketing strategy. Q2: How realistic are the assumptions of the Economic Order Quantity (EOQ) model? Discuss how the issues of safety stock can be incorporated in EOQ and reorder point (RP) while ordering inventory. Do you think the model is still used in practice? If not, what model is mostly used while ordering inventory? (Section A) The earliest article that had mentioned the Economic Order Quantity model was that of Ford Whitman Harris in 1913 (Erlenkotter,1990). Harris was an engineer with Westinghouse, and although he had only finished formal education until high school, he was a self-taught inventor who held 50 patents and wrote 70 articles (Roach, 2005, p.5). The EOQ is a formidable model that allows for management to determine the quantities of supplies or material to order so as to minimize the cost or inventory ordering and maintenance to the company. The EOQ formula is founded on the following assumptions (Roach, 2005, p. 5): (1) Demand is continuous and constant (i.e., rate of depletion of inventory is constant (2) The process continues infinitely (3) There are no quantity constraints (on order quantity or storage capacity) (4) Replenishment is instantaneous (5) No shortages are allowed (6) Costs are time and quantity invariant It is apparent that most, if not all, of these assumptions taken in their strictest sense are unrealistic. For instance, demand for certain supplies do not continue indefinitely nor are they constant, because of changes in product design to suit changing market fashions and tastes, technological innovations that render some supplies irrelevant or obsolete, and mere seasonality of demand. Obviously, there are order quantity and storage capacity limitations in terms of available storage space, otherwise a new warehouse or stockroom would have to be provided for at additional cost. Of the five assumptions mentioned, the last three have been relaxed to allow for variations in the model that would more closely approximate real world situations. In particular, the assumptions on replenishment and shortages have been addressed by the safety stock variant of the EOQ. This version allows for the reorder point to occur earlier than the basic EOQ model would allow, so that the lead time for ordering is reckoned not from the point of depletion, but from a point designated as the safety stock. Theoretically, the reorder is made with sufficient lead time so that when the new stock arrives, the existing stock is not depleted to zero, but is at a level that the firm considers as safe. The purpose of the safety stock is to allow for delays in reorder delivery, or temporary shortages, during which the safety stock will be available for consumption until delivery of new stock is made. The effect of the safety stock is to advance the reorder point only to the point that accommodates the maintenance of the safety level, and the EOQ to increase from the regular EOQ only to the level where depleted safety stock may be replenished. If the safety stock remains undepleted, then the EOQ and reorder point remain unchanged while demand rate remains unchanged. Many argue that there are Quick Response (QR) inventory replenishment methods, such as Just-in-Time (JIT), that have generally replaced EOQ. The two methods are distinctly different, proceed from essentially different assumptions, and arrive at substantially different recommendations (Zinn & Charnes, 2005, p. 119). The argument in favour of QR is that firms are seeking a more economical inventory method that requires less investment in inventory stock, reduced allocation for storage facilities, and a reduction in carrying costs. Aside from mere cost considerations, however, it is increasingly of concern to firms today that they may be stocking on the wrong type of inventory (p. 120). In highly competitive industries, demand for new products may compel businesses to switch inventory sooner than they had planned. In such cases, it may be the case that the company may find its stockroom full of goods that have turned obsolete to the production or distribution process. These would therefore represent failed investments the value of which would have fallen so quickly, and which could not be re-sold, or could only be re-sold at a huge discount. Advocates of the merits of QR criticize EOQ as an outdated method that has outlived its usefulness. It could not be denied, however, that the EOQ continues to be employed by some businesses because of their familiarity with it, and that the principles of the EOQ continue to be taught in business schools because of its usefulness as a model for conceptualizing the interplay of the various components and considerations in inventory management. This persistent use of EOQ is with good reason: after empirical examination, the EOQ method was deemed “clearly the lowest cost method if the time between deliveries is short and the order cost is high,” which goes against intuition since QR is associated with short delivery times (Zinn & Charnes, 2005, p. 138). The principal difference between the two methods is that EOQ minimizes both the ordering cost and holding inventory, while QR minimizes only holding inventory, although ordering cost is nearly always the highest cost in actual inventory management situations (p.138). Q3: Case – Section D There are elements or components in the design of products that have the same features or perform similar functions. These common aspects shared by differentiated products provide an opportunity for a particular company to combine the procedures that create these common elements. Instead, therefore, of having separate and independent product lines for each entire manufacturing process, there would be shared units where standardized components are manufactured and assembled into modules for all the products sharing the same elements. By analysing the various stages of production and identifying those that could be commonly shared, the concept of modularization and its advantage to operations was made apparent. The modular approach to operations rests in the concept of the “module” which is a detachable section, such as a unit or compartment, that performs a specific function. Each section or module has a distinct function from the other modules, but the modules are so constructed that they may interface with each other in a standardized manner. By so assembling different modules through the standardized type of interface, different products may be constructed so that certain elements are common among them while other certain elements differentiate them from one another. “The idea behind this modular construction system is that you can use the same parts, each with unique functions but with a common standardized interface, to build literally anything you can dream up” (Barker & Rawtani, 2005, p. 152). There are many advantages to modular manufacturing – or modular operations for that matter. Modules which have been standardized but which do not comprise a significant part of the company’s competitive advantage may be subcontracted to suppliers. The outsourcing of modules enables the company to save on additional capacity costs and overhead, and to realize savings on the modules that are more efficiently produced by suppliers that specialize on them and produce them at optimum volumes. Subcontracting modules to other producers could likewise allow for introducing modifications that would more closely match a product with its market. This enables the company to produce goods that have features specialized for particular markets, while retaining the features that are common to all. Furthermore, unified processing for the common modules and simultaneous processing for the specialized modules farmed out to subcontractors shortens production time (McCutcheon, 2005, p. 52). In the case given, the product was not a tangible good but an entertainment & educational show produced by Disney Channel and intended for children. Art Attack featured arts and crafts projects and is aired worldwide. Since children and audiences in general relate better to the show’s host if he or she were more racially or ethnically similar to them and speaking their language, then it makes sense for segments showing the speaking parts as comprising of one module. On the other hand, segments showing the execution of the projects, shot without speaking parts, comprised another module which could be recorded separately. Those segments were recorded in the home studio because they could be integrated in the programs aired in host locations. Modules with the speaking parts and the local presenters were shot separately, and the different modules integrated to make up the various programs. There are many similarities that may be drawn between Disney Channel’s Art Attack and the modular manufacturing of motor vehicles. For auto manufacturing, some modules are common to all car models and may be manufactured in a common setting. For instance, in the 1990s Ford contracted Canadian parts manufacturer Magna to construct complete door modules for its Taurus/Sable series of automobiles. Magna used to create individual components, thus modularizing meant developing a new set-up that fabricated complete door assemblies. Magna therefore came up with its Closures group, which today manufactures door modules for the H2 Hummer of General Motors, the Lincoln LS, and the Lincoln Navigator/Ford Explorer. Each Ford Expedition/Navigator SUVdoor module is a combination of several components including latch, window regulator, structural carrier, inside door handle, lock rods, and cables, while the Lincoln LS module includes also wire harness and speaker components (McCutcheon, 2005, p. 52). Drawing a parallel between the automobile modular assembly method and the cable TV show, those spoken modules of the TV show which are specially produced for local airing correspond to the car door modules manufactured by Magna’s Closures group. The doors are specially designed per car model and maker; the individual spoken show segments are tailored for specific host countries that will air the show. There are also differences, however; as mentioned, car module manufacturers produce tangible goods (motor vehicles), while Walt Disney produces a “soft” product, in terms of the shows for viewing. These could be regarded as intangibles, because what they provide audiences are the experiences, information and knowledge, as in Art Attack. The modular nature of the process and the production system it employs remain the same. References: Axsater, S. 1980 “Economic order quantities and variations in production load.” International Journal of Production Research, Vol. 18 Issue 3, p359 Axsater, S. 1981 “Economic order quantities and variations in production load: interpretation of capacity costs as costs for regular capacity and overtime.” International Journal of Production Research, Vol. 19 Issue 4, p439 Barker, M & Rawtani, J 2005 Practical Batch Process Management. Elsevier, Jordan Hill, Oxford Cargal, J M (n.d.) The EOQ Inventory Formula. Mathematics Department, Troy University. Accessed 15 October 2011 from http://www.cargalmathbooks.com/The%20EOQ%20Formula.pdf Erlenkotter, D 1990 “Ford Whitman Harris and the Economic Order Quantity Model” Operations Research, Nov 1, Vol. 38, Issue 6 Kanet, J J & Miles, J A 1985 “Economic Order Quantities and Inflation,” International Journal of Production Research, Vol. 23 Issue 3, p597 McCutcheon, D 2005 “Modular Manufacturing,” Automotive Manufacturing Solutions, Nov/Dec pp. 52-53 Roach, B 2005 Origins of the Economic Order Quantity Formula. Washburn University, Topeka, KS. Accessed 15 October 2011 from http://ir.washburnlaw.edu/bitstream/10425/114/1/Origins%20of%20the%20Economic%20Order%20Quantity%20Formula.pdf Rogers, H B 1968 “Economic Order Quantities.” Industrial Management, Vol. 10 Issue 5, p2 Zinn, W & Charnes, J M. 2005 “A Comparison of the Economic Order Quantity and Quick Response Inventory Replenishment Methods.” Journal of Business Logistics, Vol. 26 Issue 2, p119-141 Read More