Intelligent Microwaves, Inc. (IMI) produces a wide range of personal and commercial microwaves, including a heavy-duty microwave oven for use in restaurants and other heavy use environments. Their microwaves are considered to be very reliable and have many “intelligent” features that customers appreciate. Recently, however, competitive price pressures have cut into IMI’s profit margins and they are taking a look at their operations to try to find ways to reduce cost while maintaining or improving product quality and customer service. You have been asked to look at their production and distribution of their heavy-duty microwave oven.
IMI actually produces 6 models of the heavy-duty microwave but they are essentially the same except for the power supply and the language of the instructions that are on the microwave. These differentiating features result in the 6 models and are necessary to meet the requirements of different overseas customers. IMI has always produced each microwave model in batches large enough to satisfy one month’s worth (30 days) of average demand. Historical records indicate it takes them on average 30 days, with a standard deviation of 4 days to produce a batch and an average of 7 days, with a standard deviation of 2 days, to ship a batch of microwaves to the appropriate warehouse in the appropriate country. There is a setup cost of $1000 to get the production line prepared to produce any of the heavy-duty models. One microwave of any model is valued at $500. Through trial and error over the last few years, IMI has found that using a reorder point of 51 days of supply (51 times the average daily demand) has given them a reliable performance, only running out of microwaves about 2% of the time while waiting for a new shipment to arrive. IMI uses an inventory carrying charge of $.25 per dollar of inventory per year.
You are to do the following:
- What would be the potential benefits of selecting both the production batch sizes and the reorder points more scientifically? Do this by completing columns B through H of the ANALYSIS tab of the template provided. Using the concepts of Economic Order Quantity and Reorder Point, explain the difference between this model and IMI’s current practice.
- What if IMI was able to fully standardize the heavy-duty model to the point where the language and power supply customizing features could be added in a modular fashion immediately before shipping to the warehouse that needs them? You consulted with the production superintendent, who indicated that this could be done, but that it would add one day to the ship time to add these customizing features to the standard microwave just prior to shipping.
Consider it this way. IMI maintains a warehouse right next to their factory and they store inventory for models A, B, C, D, E, and F. Therefore they have to maintain separate inventory for each of the models. If they standardize to a single model, it may take them a day to ship, but they only need to keep one type of microwave in their warehouse.
For this part use the SINGLE MODEL column of the ANALYSIS tab and consider the impact RISK POOLING has should IMI combine all models. Using the inventory concepts we discussed in class, explain to IMI why they might achieve some cost benefit by embracing the idea of replacing all of their models with a single model.
4. Assuming that you have now convinced IMI to standardize on a single model of microwave, investigate other opportunities that IMI may have to reduce costs or improve customer service. Look at the components of total cost (not limited to transportation time, order cost, supply or demand variability) and make a recommendation to IMI on where else they may want to focus their efforts. Justify your recommendations.
A way to reduce holding cost is to reduce lead time by a 10%. This would mean that you’ll have the opportunity to cut down on the amount of stock that you keep on hand to cover your waiting time. And with a higher frequency of shipments, you can also start looking into ordering smaller quantities more often and reduce the size of your storage facilities.
Remember this paper is a presentation to IMI. It is your analysis of their inventory situation. Your paper should be professionally structured, well-organized, insightful, start with an executive overview, and conclude by emphasizing the most important parts of your analysis.