Capacity Planning, Inventory and Design - Case Study Example

The Basic Economic Order Quantity Model is one of the most widely used Inventory control management systems. This is due to its simpli and its general nature. The EOQ model is based on several assumptions that make the application of this technique quite easy. The assumptions are: 1. The demand of the product in the inventory is constant and independent 2. The lead time that is the time it takes for the order to be placed and received is also known 3. The receipt of the inventory is quite is instantaneous and comes in one batch at a time. 4. Quantity discounts are not available or cannot be availed 5. The only variable costs involved with this model are the cost of setting up an order also known as the setup cost and the cost of holding inventory also known as the carrying cost. 6. Stockouts or shortages can be avoided if the timing of placement if the order is accurate. Although these assumptions may not be so realistic for many kinds of inventory and might be difficult to follow through as in real life there can be many issues and hindrances that lead to changes in any of the above mentioned assumptions, it is quite a useful model for inventory which is standardized and has an approximately constant demand. It allows the company to estimate if not accurately predict what level is the optimum level of inventory that would reduce all costs to minimum and help company avoid losses due to damage, theft or any other unforeseen circumstances. Although it makes it difficult to get bulk discounts the overall saving from variable costs proves to be much more than what the company would save in bulk discounts. Show how the design process impacts on the delivery of product and services? (300 words) The aim of a good design strategy is to ensure that the strategy implemented in designing the product provides the company with the competitive advantage in a very dynamic market environment. Changes such as social, economic, technological all lead how a product should be designed and delivered. If a product is standardized then it can be produced anywhere in the world and delivered to the customer. However, if it requires changes according to cultural trends prevailing in different regions then it may require the process to have some areas where customization can take place. Design process can have a great impact on the delivery of both goods and services, as services industry also refer their offering as products. We can look at the example of Dell; Dell has built an entirely new and large market for its one of a kind product design process. Its process enables the company to make the end product with the exact kind of hardware and software that the customer desires and delivers it wit great speed. This is because it knows that speed to a technology oriented market is very important. If Dell’s design process did not involve the warehouse being one of the places where the custom features are added, it would not have been able to deliver such a differentiated product with such fast and reliable speed. Similarly in the service sector it is very important that the end product is near to the customer base so that delivery can be fast and to the satisfaction of the customer. Since services are produced and consumed simultaneously, process design needs to be effective and reliable. We can take the example of Alliance Insurance’s products. When the company offer’s a customer its homeowner’s policy, it gives the customer the service as a product, that is an entire package that includes all clauses and conditions. This process allows standardized delivery to the customer hence emphasizing the importance of design on delivery. CASE STUDY: Delta Synthetic Fibers (DSF) a) Prepare a reasoned plan to meet the demand Table 1 Forecast sales for Britlene & Britlon (millions of kg per year) Potential sales Britlene Britlon 2009(actual) 24.7 - 2010 22 - 2011 20 - 2012 17 3(assuming available) 2013 13 16 2014 11 27 2015 10 29 Total No of Plants: 5 Capacity of production in each plant (after allowance for maintenance): 5 million KG per year. Total capacity output per year: 5*5=25 million kgs. Till 2012 if no new plant is installed, however one is converted into a Britlon plant then Capacity will suffice demand. 2 New plants need to be setup new plant at either the existing site (which takes two years) or New site( which takes two and a half years) in 2011 and then two more in 2012, also start conversion of one more plant in 2012 for Britlon for 2014 . 2013 3 plants producing Britlene 3*5=15 Million Kg total capacity Required= 13 million Kg Residual= 2 million Kg 4 plants producing Britlon (2 new and 2 converted plants) 4*5=20 million Kg Required= 19 million Kg Residual= 1million Kg 2014 2 plants producing Britlene 2*5= 10 million Kg Add one million that could be produced last year. 6 plants producing Britlon (3 new and 3 converted plants) 6*5=30 million Kg Required=27 million Kg Residual= 3million Kg 2015 2 plants for Britlene 2*5= 10 million Kg Required= 10 million Kg Residual= 0 million 6 plants producing Britlon (3 new and 3 converted plants) 6*5= 30 million Kg Required= 29 million Kg Residual= 1 million Kg. b) Where to make changes and why to make those changes there? As the demand for the product is leading with incremental expansion it is necessary for delata to make changes in terms of capacity planning. Since the new product Britlon, is one that will cannibalize the original product, Britlene, it is very important that capacity to meet the increasing demand of the latter be met and steps should be made to reduce the production capacity of Britlene as in the long run it will be fully cannibalized by Britlon. Conversions of plants are a more appropriate choice as over the period the demand for Britlon is increasing rapidly and Britlene’s demand is falling. Conversion of plants saves both and cost and time and the labor both skilled and unskilled are available at existing factory locations making it a more viable choice. C) What factors would impact the decision and why? The factors that would affect Capacity Planning in the case of Delta are: 1. Demand of the new Product: the demand is the most important factor. It is very important for the organization to predict the kind of demand and ways to meet the demand if it wants to stay ahead in the game. Since the company believes the new product has various uses forecasting demand should be the most important factor. 2. Labor: availability of labor will have a major impact on where it decides to open a new plant or convert the existing plants. If labor isn’t available it can have an adverse impact on the firms plan to produce the new product and meet demand. 3. Technology: the availability of technology or providers of technology that can help convert the existing plant into one for the new product and the costs associated with it can have a major impact on capacity planning 4. Cost: the overall cost such as looking for new land for new factories or other costs can have an impact on the capacity planning decisions. If the cost of increasing capacity does not produce incremental profits or add value to the business the company might not want to go along with the strategy to change its capacity. Britlene, that’s accounts for 95 per cent of its sale, is their major source of revenue. If costs increase they could suffer major losses. 5. Marketing or promotional efforts: How responsive the market is to the new product is also important for the organization as it can have a major impact on the company’s demand forecasts and predictions. The company has to ensure that its customers understand how the new product could be used in different industries such as clothing industry. 6. Seasonal Demand: Since the clothing industry does follow seasonal trend, especially wool clothing the seasonal demand can have a great impact as well. The company should ensure seasonal adjustments are made for a constant and smooth production. Capacity should follow seasonal trends and patterns. d) What are the dangers involved while changing the capacity plan? Since the capacity planning decisions are based on forecasted demand of the new product, problems can occur if demand exceeds the forecasted figures thus increasing capacity. This can cause rise in costs, rise in lead time and reduced revenue If Capacity exceeds demand, the cost of unutilized capacity can increase the overall cost of the product making it difficult to compete in the market. The fixed costs may become to high to keep the marginal cost to produce good profitable. Since Britlon is similar to the original product problems can also occur if the existing consumers are satisfied with the original product and may not want to pay the price for an added feature in Britlon. To go back to original plants or shutting down new plants that were opened to meet the capacity might result in major losses. Britlene provides 95 per cent of the company’s revenues, if capacity plan is changed and does not result in the sales the company hoped for it could lead to total meltdown of the company. Reference 1. Heizer J. Render B., Operations Management, Prentice-Hall, Sydney. Read More