User Account

All Pages

A Make or Buy Analysis, Operation Management

Assignment Help:
A Make or Buy Analysis

Managers at Wagner Fabricating Company are reviewing the economic feasibility of manufacturing a part that it currently purchases from a supplier. Forecasted annual demand for the project is 3,200 units.
The accounting department at Wagner has established a cost of capital of 14%, for the use of funds for investments within the company. In addition, over the past year US$600,000 has been the average investment within the company’s inventory. Accounting information shows that a total of US$24,000 was spent on taxes and insurance related to company’s inventory. In addition, an estimated US$9,000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. A remaining US$15,000 was spent on warehouse overhead, including utility expense for heating and lighting.
An analysis of the purchasing operation shows that approximately 2 hours are required to process and co-ordinate an order for the part regardless of the quantity ordered. Purchasing salaries average US$28 per hour, including employee benefits. Also, a detailed analysis of 125 orders showed that US$2,375 was spent on telephone, paper and postage directly related to the ordering process.
Currently, the company has a contract to purchase the part from a supplier at a cost of US$18 per unit. However, over the past few months, the company’s production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and the company is considering that alternative of producing the parts itself.
A 1-week lead-time is required to obtain the part from the supplier. An analysis of the demand during the lead-time shows that lead-time demand is approximately normally distributed with a mean of 64 units. The standard deviation was estimated to be the square root of the mean. Service level guidelines indicate that the company frowns upon more than 1 stock-out per year.
Forecasted utilisation of equipment shows that production capacity will be available for the part being considered. The production capacity is available at the rate of 1,000 units per month, with up to 5 months of production time available. Management believes that with a 2-week lead-time, schedules can be arranged so that the part can be produced whenever needed. The demand during the 2-week lead-time is approximately normally distributed, with mean 128 units and a standard of 20 units. Production costs are expected to be US$17 per part.
A concern of management is that set-up costs will be significant. The total cost of labour and lost production time is estimated to be US$50 per hour. Contractual arrangement and demands of union dictate that the company operates 250 days for the year. Also, an 8-hour shift will be needed to set up the equipment for producing the part
Management has also expressed the desire to take advantage of talk about a quantity discount offer from the supplier. Indications are that the supplier is willing to give the following discount:
Table 1
Order Size Unit Cost
0 - 399 US$18.00
400 - 999 US$17.00
1000 - 1799 US$15.85
1800 and over US$15.00



Required
1. Develop a report for Wagner Fabricating that addresses the question of whether the company should continue to purchase the part from the supplier or begin to produce the part itself. The report should address the following:
a. An analysis of the holding costs, including the appropriate annual holding cost rate.
b. An analysis of ordering costs, including the appropriate cost per order from the supplier
c. An analysis of the set up for the production operation
d. A development for the inventory policy for the following two alternatives:
i. Ordering a fixed quantity Q from the supplier
ii. Ordering a fixed quantity Q from in-plant production
e. The report should include the optimal quantity Q*, the number of production runs per year, the cycle time, reorder point, safety stock, expected maximum inventory level, annual cost of the units purchased or manufactured. You need to give a comparative analysis of the cost of purchasing versus the cost of producing, and the optimal quantity under the discount policy.
2. The push and pull systems of inventory management and control need to understood fully, in order to apply their principles effectively. Discuss, in the context of any manufacturing entity in Jamaica (using appropriate examples, as seen fit). Note, stay within the following word range (WR): 1200 = x = 1600.

Related Discussions:- A Make or Buy Analysis

Explain technology have an impact on capacity planning, In what ways does t...

In what ways does technology have an impact on capacity planning?

How to develop a supply chain infrastructure, What approaches can be taken ...

What approaches can be taken to develop a supply chain infrastructure that provide an accurate view of overall channel performance?

Describe the response of the organization, The issue of fraud must be consi...

The issue of fraud must be considered when managing risk as it could present a major liability to the organization. Fraud is an act that requires an aggressive response and correct

Explain considerations in designing organisation structure, Explain main co...

Explain main considerations while designing the organisation structure. While designing the organisation structure, there are two major considerations:  - Differentiation an

Explain decision alternative and state of nature, A payoff a. is always mea...

A payoff a. is always measured in profit. b. is always measured in cost. c. exists for each pair of decision alternative and state of nature. d. exists for each state of nature.

Explain cost management processes, Cost management processes are involved i...

Cost management processes are involved in estimating, budgeting and controlling costs so that the project can be completed within the approved budget.

Explain total quality improvement organizational downsizing, Analyze how ea...

Analyze how each has changed healthcare delivery on both the macro and micro levels. Provide specific examples of how both macro and micro impacts/changes: Total quality improvemen

Explain dispute arises the hotel management, A famous New York City hotel, ...

A famous New York City hotel, Hotel Lux, is noted for its food as well as its luxury accommodations. Hotel Lux contracts with a famous chef, Chef Perlee, to become its head chef at

Explain the common grounds for discharge, Describe the common grounds for d...

Describe the common grounds for discharge and the procedural requirements that are outlined in many collective bargaining agreements. State why the following are important when the

Service level agreements, Service Level Agreements are normally associated ...

Service Level Agreements are normally associated with   Outsourcing.

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd