Indian Institute Of Management, Bangalore
Nichols Company Submitted to Prof. L S Murty On 12th October 2012
Submitted by Group 9 Akshay Ram L
1111004
Dinesh Kumar Pandey
1111025
Irshad Ahamed
1111031
Prabha Kumari
1111048
Viraj Kamboj
1111235
Contents 1.
Introduction .................................................................................................................................... 3
2.
Product Portfolio ............................................................................................................................. 3
3.
Methodology................................................................................................................................... 3 3.1 Cost Analysis ................................................................................................................................. 4 3.2 Work Centre-3 Capacity Adjustment by Product ‘B’ Adjustments ............................................... 5
4.
Lot sizing.......................................................................................................................................... 6 4.1 Approach ....................................................................................................................................... 7 4.2 Cost Analysis ................................................................................................................................. 8
1. Introduction Joe Williams is the founder President of Nichols Company (NCO). It manufactures three primary products and has 355 full-time employees. NCO is currently undergoing some supply chain issues which has affected its customer service. An internal review meeting has highlighted issues with demand forecasts and inventory management. Off the mark demand forecasts has resulted in Production department working overtime to expedite one product or another to meet the current demand. Inefficient inventory management system has led to higher inventory levels and stock-outs at the same time.
2. Product Portfolio A, B and C are the three primary products. D, E, F, G and H are the various components used in the primary products. I is the raw material used in manufacturing the component D and I.
D(4)
E(1)
C
B
A
F(4)
I(3)
F(2)
G(3)
G(2)
I(2)
I(2)
H(1)
3. Methodology We should look for the capacity constraints at both MPS and MRP level since at MRP level the capacity might become infeasible. The MRP plan should not violate the capacity constraints. There are four methods to rectify the infeasibility if the capacity constraint gets violated-order split, order shift, re- routing and sub contracting. Since in various weeks we had underutilized capacities and we could have used it, hence we decided to go for the order shift. As there were very few weeks where we were exceeding the limit, sub contracting was not a good idea. There was no option available for rerouting. By incurring the backorder cost for sub components the main component could be produced on time. But since we were pegging the subcomponents (no independent demand for Sub components) we would consider the backorder cost for the final component. Backorder costs were higher than the inventory holding cost and hence our solution is to prebuild in the periods where capacity is underutilized. There were capacity constraints at work centre 3 for period 3, 12- 17 and 24-25.Also there are
capacity constraints at work centre 4 for periods 12-16. Component F was the big user for work centre 3, hence we decided to adjust the planned release for product A. For e.g in period 25 capacity is over utilized by 50 hrs(2450-2400).One component of F requires 0.2 hrs; hence in 50 hrs 250 units of F is produced. So 63 units of A (=250/4) should be deducted from the planned release of period 26, since for F’s production there is a lag of one week. In some periods where the capacity was overloaded at both the work centres 3 and 4 we adjusted the units of A directly at work centre 4 and at work centre 3 via component F. Total cost for adjustments made in A is $ 7434531.(including inventory and production cost)
3.1 Cost Analysis There were three costs involved in the entire process to judge for the optimal solution provision. 1. Work-center cost The work center costs calculated are as follows: WC1: $1936325 WC2: $1885756 WC3: $1926435 WC4: $1648790 2. Inventory Cost The inventory cost table is as follows: Item
Cost ($)
A B C D E F G H I
31930 1200 1050 600 585 360 600 600 300
We also tried to adjust the units of B and C but were not able to produce with the required capacity constraints as the capacity limit was getting exceeded for few periods as shown below. Since B was using only 0.08 hrs at work centre 4, hence it was not sufficient to reduce its quantity and meet the capacity constraints.
3.2 Work Centre-3 Capacity Adjustment by Product ‘B’ Adjustments To maintain the capacity constrain of both Work Centre-3 and Work Centre-4, total number of units to be held is computed to be 2738. But these units are beyond Original planned release of 2300 units. So we can’t adjust more than 2300 units for Period-15. Calculation is shown in below given screen shot -
And even if adjust all the 2300 units i.e. basically produce zero units of B then also Work Centre-4 load (1235 hours) would be higher than its capacity (1200 hours). So adjustment in Product-B productions alone is not viable to meet capacity constrain of all work centres as shown in below given screen shot -
4. Lot sizing Lot sizing is a series of decisions incorporated in order to account for operational efficiency. Goods produced in lots account for increased efficiency. There are various characteristics of lot sizing. It directly impacts the:
Inventory levels Setup and Ordering Costs Capacity Requirement Availability
The lot sizing decision is impacted by:
Number of levels in the Bill of Materials (BOM) Cost of setup or purchase order Cost of carrying an item in inventory Low level code of an item
There are various lot sizing techniques available. The Lot-for-Lot sizing technique has been incorporated to solve the case. This technique generates planned orders in quantities equal to the net requirements in each period. The advantage here is that we don’t have extra hand on inventory. End items A, B and C was ordered in the multiples of 100.
For the components D, E, F, G, H we have used pegging because these components have derived demand. These were ordered in the multiples of 500 units. The raw material I was ordered in the multiples of 1000 units.
4.1 Approach Firstly, the planned order releases were changed based on the lot sizes for the respective components as given in the excel sheet.
Exhibit 1
The exhibit depicts the end-product A with the MRP schedule with a lot-size in multiple of 100 units. The adjustments attribute mentions the difference between the original and the new planned releases in order to meet the capacity constraints of the work-centers (mainly WC3 and WC4). Once MRP scheduling through L4L method was done, the capacity constraint for the work-centers was needed to be met. As explained in the previous section, we chose A to be the primary component for meeting the capacity constraints. A MS-excel formulation was applied to model the lot-size for each period. This was PORt = Net Reqt+1 ; IF(MOD(Net Reqt+1,Lot-size)=0) = Net Reqt+1 + Lot-size - MOD(Net Reqt+1,Lot-size); otherwise For more details please refer to the excel sheet. After this the actual Planned order release was calculated by adjusting for the capacity constraints for C-3 and 4.
Exhibit 2
As mentioned in the exhibit, the WC capacity constraints are mentioned using the yellow color code and the weekly capacities are adjusted accordingly. It was observed that the capacity utilization was pretty high above the average levels.
4.2 Cost Analysis There were three costs involved in the entire process to judge for the optimal solution provision. 5. Work-centre cost The work centre costs calculated are as follows: WC1: $1938700 WC2: $1889250 WC3: $1929200 WC4: $1652105
6. Inventory Cost The inventory cost table is as follows: Item
Cost ($)
A B C D E F G H I
42800 1200 4650 7350 11198 8610 7200 8550 14600
7. Back-order cost The back order cost was only incurred for A which is equal to $2000, since B and C were ignored as non-optimal choices.
5. Appendix Nichols Company Group-Q1.xls
Nichols Company Group-Q-2_A.xls
Nichols Company Group-Q2-B.xls
Nichols Company Group-Q-3.xls
