siet_lakshyacase_group2

8/10/2019 SIET_LAKSHYACASE_GROUP2

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SEIT Assignment

1

Lakshwiz Factory Module

Radharaman Jha 65

Rishabbh Sahu 69

Salil Parashar 74

Yash Deep Pandey 103

Mohit Mahant 104

Group 2


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Case Summary

2

GapsAnalyzed

Inventory shortage problem and excess inventory in some items

Material shortage -> Delayed production and delivery of thefinished product -> Huge loss to the company

High transportation cost and also the cost of holding the inventory

Most of the suppliers more than 200 kms away from the plant

Company

Autoflex industries, established in 1961, Leader in Auto Electricalsin India with expertise in design and manufacturing.

4 out of 5 vehicles rolled out daily in India are fitted with Autoflexproducts.

All the products are manufactured at Autoflex, Coimbatore plant( 3separate plants for different products).

Overall, Autoflex Industries, Coimbatore has about 900components to be procured, which get assembled into differentproducts depending on the specification.

Major customers are: Almost all auto manufacturing companies in

India and few companies abroad.


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The rental cost of the warehouses include the setting up of the warehouse, no

separate capital investment is required in any of the 4 locations.

We have assumed that the company uses a standard software based MRP system

which shows real time inventory level data. If not, it can be bought but we have not

included the cost for buying and switching to this system. Though we have kept a

safety stock to compensate for demand fluctuations, the calculations have been made

assuming constant rate of utilization of components

Though the case clearly mentions the fluctuations in demand, but no break-up or

forecast on monthly basis has been provided

The demand mentioned in the question is the actual demand and not a forecast

The transportation cost is 50% of the ordering cost

Since the ordering cost in Pondicherry is Rs1500, it is likely that a major

component of the ordering cost in other cities would be transportation cost.

Thus the ordering cost for the new model has been considered 70% of the currentordering cost (30% reduction in ordering cost due to reduction in transportation

cost which is almost 50% of ordering cost).

The size of the components has not been considered

Assumptions


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Each warehouse has enough space to keep all the inventory at the same time Since we do not have sufficient information regarding the above two points in the

case

The prices and the ordering costs remain the same throughout the year

The demand given would be applicable from the day this strategy would be used

The benefits calculated are from 115 components mentioned in Appendix VII of the

case provided

Since the details of the rest of the components has not been provided.

The MRP system used is software based and is capable of showing inventory data

almost in real-time

Autoflex is a leader in Auto electrical in India, and as mentioned in the case most of

the MRP systems these days are software based.

The item: V Milling Rear has been excluded from the calculations, since the demand

given in exhibit VII for this item is 0

Although the company procures around 900 items, only the ones in exhibit VII have

been used to calculate the cost benefit using this model.

Assumptions Continued..


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Old Model (As-

is) Centralized warehouse:

One warehouse at

Comibatore

2-Bin System

Ordering System: Lot for

Lot

Product Managerpurchasing components

Proposed New Model

New Model(To-be) Decentralized warehouse

: Four warehouses, one

in each Bangalore,

Chennai, Pondicherry

and Coimbatore

Safety Stock

Ordering System :

Economic Order Quantity

Sourcing manager who

keeps a record of the Bill

of materials (BOMs)

made by a product

managers

Advantages ofNew Model Since most of the

suppliers are located

nearby these 4 cities, we

can significantly cut on

transportation costs (usingfull truck loads) and

inventory costs

Safety stock would help in

optimal space utilization

and reduction in costs

compared to 2 Bin

system. Ordering using EOQ

reduces the inventory and

transportation costs

significantly

The BOMs can be

combined for full truckload or FTL


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The Material Requirement Planning (MRP) System

We should also use the Continuous review policy, this would help us reduce theordering cost and also save on extra inventory holding costs. Using this system well

order only those components which are on the limit and need to be re-ordered as per

the re-order point formula.

Instead of product managers ordering for themselves we will have a sourcing

manager who can order on behalf of them, each product manager should raise a bill

of material (BOM) that he/she needs. This BOM should reach the sourcing manager,who would give a collective order to the warehouses.

The sourcing manager at the warehouses should keep a check on the inventory

levels, should order as the inventory reaches the re-order point.

MRP System and EOQ Model

The EOQ ModelOrdering costs vary inversely with carrying costs. It means that the more orders a

business places with its suppliers, the higher will be the ordering costs. However, more

orders mean smaller average inventory levels and hence lower carrying costs.

It is important for a business to minimize the sum of these costs which it does by

applying the economic order quantity model.

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Annual Demand (d)Ordering Cost (c)

Price of component(h)

No. Of Orders(Lotfor lot) (n)

Quantity to beordered as per new

model(EOQ) (q)

Cost of procuringas per new model

(y)Handling cost (new

model) (x)

Variables

Set of Variables and Formula used

Formulas used:

Quantity ordered (Lot for lot) (Q) = d/n

Annual Cost for double bin (Lot for lot)(For a component) = (c + h/5*Q/d*2)*d/Q

Quantity ordered (new model) (EOQ) (q)=(2*0.70*c*d/((h/5) + x))^0.5

Total cost of component (new model) =(0.70*c + h/5*q/2*q/d + q/2*x*q/d)*d/q

Safety Stock = Z * STD * L^0.5

Where: Z is a factor, referred to as Safety

Factor(associated with service level), STD :

Standard deviation in demand per unit time,L :

Lead time for getting the component

Variables


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Reordering pointThe inventory level at which an order should be placed; it considers two

factors:

Safety Stock

The safety stock is the amount of inventory that needs to be kept at

the warehouse in Coimbatore to protect against deviations fromaverage demand.

Average inventory during lead time= L * AVG

L : Lead time for getting the component

AVG: Average demand per unit time

Thus,

Reorder point = Average inventory during lead time + Safety

Stock

= Z * STD * L^0.5 + L * AVG

Reorder Level

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The following table and graph shows the cost analysis done for the component:

Condenser (All Products)

Example

Microsoft Office

Excel Worksheet9


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Cost Benefits

The annual cost benefits by using this model as per the sheet = Rs 2,44,52,381.2

The annual rental costs of ware-houses = (5,000+10,000+15,000+20,000)*12 = Rs

6,00,000

Cost Benefit Warehouse rents= Rs 2,38,52,381.2

Safety stock

The cost incurred in safety stock has not been subtracted from the net benefit

since the lead times and the demand fluctuations would vary for each component.

If we consider the safety stock to be around 30% of average inventory of a

component, the total sum for storing safety stock of all components in exhibit VII =

Rs 41,05,355

Thus Approx Net Cost benefit = Rs 2,38,52,381.2 - Rs 41,05,355

= Rs 1,97,45,025

The net cost benefit is only from the components mentioned in exhibit VII, the cost

benefits would increase further if the model is used for all the 900 components

procured by Autoflex Industries.

Cost Savings

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Thank You

siet_lakshyacase_group2

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