SCMN 3320 – WINTER 2015

ASSIGNMENT #2 – INVENTORY & LOCATION

Due: Thursday April 2nd, 2014 at the start of class.

Liberty Electronics, based out of Quebec City, designs and assembles satellite radios, receivers and accessories for a major satellite radio provider. They have annual sales of approximately $25 Million.

In the contract with the major satellite radio provider, Liberty is not only responsible for the design and assembly of the satellite radios, but also their distribution to authorized satellite radio sales & installation facilities. This allows the satellite radio provider to focus on programming while leaving the manufacturing and distribution to Liberty.

Satellite radio sales had been in a growth stage over recent years; however the industry is now facing more stable demand. In addition to the market maturing, major satellite radio providers have recently signed exclusive contracts with automobile manufacturers to include satellite radios as standard equipment in all their makes and models. It is hoped that this demand stability will enable the satellite radio manufacturers such as Liberty to improve their operational efficiencies, reducing costs for end consumers.

Furthermore, Liberty has recognized the market importance of being a sustainable organization and they are eager to improve their triple bottom line performance.

The contracts with the automobile manufacturers involve aggressive price cuts over the contract term. Historically, the high demand during the growth phase of satellite radio enabled manufacturers to make strong profit margins. Although some employees called for improving Liberty’s inventory and supply chain management over the years, their concerns were largely ignored due to the profitability that was being achieved. With the aggressive price cuts included in the automobile manufacturer contracts, Liberty’s management has recognized that they need to improve in order to remain profitable.

They have asked you for advice on the following:

  1. Inventory Costs & Tradeoffs (3 marks)

To help develop employee “buy-in” for the inventory and supply chain management changes, management has decided to provide an “introduction to inventory” information session for all staff. One of the things they would like to provide staff is a brief “tradeoff chart” that shows how various types of inventory costs influence decision making. Management is planning on providing your tradeoff chart on the bottom half of the information session agenda. They have provided the following structure for you to use:

3 Marks (1 per tradeoff)

Cost Type / VS. / Cost Type / Brief Tradeoff Explanation / Example
~~~~~~~~~~~~~ / VS. / ~~~~~~~~~~~~~ / ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~ / VS. / ~~~~~~~~~~~~~ / ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~ / VS. / ~~~~~~~~~~~~~ / ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
  1. ABC Classification & Application (16 marks)

Liberty’s CEO recently attended a business leader’s conference where the results of improved inventory management techniques at an international computer chip maker were being presented by the firm’s management. Excited by the improvement results presented, Liberty’s CEO is eager to apply these techniques, but is not sure exactly how.

The CEO would first like a general description of what each concept is, and the benefits each technique could provide for the following techniques: (4 marks)

  • ABC Classification
  • Periodic vs. Continuous
  • Cycle counting

Secondly, accounting has provided some inventory data below and the CEO would like to know how you recommend applying the techniques at Liberty in the format of an ABC analysis. For each item, recommend: (12 marks)

  • An ABC Classification (A/B/C)
  • An appropriate inventory system (Periodic or Continuous)
  • A cycle counting frequency (monthly / quarterly / semi-annual)

Tip: Extend the following chart by adding a column for each of these

Item # / Item Description / Unit of Measure / Unit Cost / Annual Volume
C-44890 / Controller Back Plate / PCS / $5.00 / 52,500
F-67438 / Power Adapter / PCS / $6.00 / 51,000
F-37951 / Receiver Box / PCS / $38.00 / 50,500
C-44790 / Controller Face Plate / PCS / $8.00 / 53,500
C-42855 / Input Port / PCS / $0.95 / 74,500
C-94365 / LCD Screen (5" X 3") / PCS / $27.00 / 61,500
A-57429 / Power Extender Cable / PCS / $7.50 / 47,500
C-28572 / Circular Control knob (1") / PCS / $0.60 / 52,500
C-87765 / Memory chip / PCS / $29.00 / 56,000
S-36275 / Insulated wire (12V) / FEET / $0.15 / 145,000
S-86473 / 1/2" phillips screw / PCS / $0.03 / 375,000
S-37991 / Plastic tie (locking) / PCS / $0.02 / 150,000
C-28451 / Touch Button - arrow / PCS / $0.10 / 225,000
A-53279 / Remote (w/lithium battery) / PCS / $41.00 / 1,500
C-76554 / Micro Antenna / PCS / $11.00 / 37,500
  1. Ordering Analysis (12 marks)

The major satellite radio provider has recognized that some of their subscribers would like to bring their satellite radios into their homes when they are not in their automobile. Correspondingly, they have tasked Liberty with providing a “home docking station” that is compatible with their satellite radio system. Liberty plans to purchase the docking stations from an external supplier and re-sell them to the authorized dealers. Liberty has researched alternative suppliers and the data provided below would be valid if Liberty agrees to a one-year contract with the supplier. Liberty has estimated that their relevant holding costs are 30% per annum. The sales department is confident that daily demand will be around 25 units with a standard deviation of 10 per day. Uncertainty exists however on the delivery lead time from the suppliers. Desiring a 99% “fill rate” for this item, Liberty has decided to base their safety stock quantity on the worst case scenario of the total delivery lead time from the supplier. Assume a 365 day year.

Supplier Location / Toronto / Atlanta / Mexico City / Bangkok / Beijing
Payment Currency / CDN / USD / MXN / THB / CNY
Unit Cost ($CDN Equivalent) / $49.00 / $47.50 / $46.00 / $44.00 / $43.00
Order Process / Automated / Semi-Automated / Manual / Manual / Manual
Order Costs / $10.00 / $45.00 / $175.00 / $350.00 / $425.00
Primary Method of Transport / Truck / Rail / Rail / Ship & Rail / Ship & Rail
Normal Lead Time (days) / 4 / 7 / 15 / 40 / 45
Lead Time Variation (days) / -1 to +3 / -2 to +5 / -5 to +10 / -10 to +20 / -10 to +25

For each alternative, calculate the following: (9 marks)

  1. Economic Order Quantity
/
  1. Safety Stock Quantity
/
  1. Reorder Point

  1. Average Inventory Level
/
  1. Inventory turns per year
/
  1. Total Annual Cost

Note: Do not round calculated values. For formatting purposes, display two decimals.

Include your formulas used - in Microsoft Excel, Press CTRL + ` (grave accent). Activate the printing of the “row and column headings” in page setup.

Which alternative would you recommend Liberty use? Why? (3 marks)

  1. Facility Location (9 marks)

Due to recent supply and quality issues, Liberty is considering making the satellite radio receivers themselves rather than continuing to buy them from suppliers. In fact, they strongly believe they could sell their own manufactured receivers to other electronic manufacturers in addition to supplying their own needs. Correspondingly, Liberty has begun the process of short-listing potential locations for a receiver manufacturing facility. Liberty has identified 5 countries and would like you to analyze and recommend which country they should select for their receiver manufacturing facility.

Using the multi-criteria location method (Global Facility Location), determine the best location based on at least five different CSFs. Briefly discuss the rationale for weighting the CSFs. Use the following structure:

CSF / Relevancy / Weight / Ratings
Bolivia / Mexico / Sweden / Taiwan / Ukraine
Total

Note: extensive research is not required, however citation of sources used (ex. www.cia.gov world factbook, etc) is required.

  1. Supplier Collaboration (6 marks)

In the spirit of collaboration, Bear Electric, one of Liberty’s most important suppliers wants to support Liberty’s overhaul of their inventory management practices by improving their own. Bear purchases and supplies an important part to Liberty that is not used in all accessories but must be available when required. Bear is open 7 days per week, 365 days per year. On average, Bear sells 18 of the key part to Liberty daily. Inventory holding costs are $0.50 per part per year. Ordering costs are $12 per order. Lead time is two weeks. Backorders are not permitted due to a contract with Liberty.

a) Based on these data, calculate the economic order quantity and re-order point.

b) Management at Bear is concerned about this model because demand from Liberty really varies. The standard deviation of demand was determined from a data sample to be 6.15 components per day. The manager wants a 99.5% service probability. Determine a new inventory plan based on this information and the data in (a). Use Qopt from (a).

c) By how many units would the re-order point change if the service level was reduced from 99.5% to 90%?

NOTE: As stated in class, this assignment is intended to provide you with the opportunity to apply the tools taught in class and serve to prepare you for your examination. Each group member should do the work independently, i.e. work on each question on their own, and come prepared to group meetings with material to discuss. Accordingly, I require each group member’s rough work to be handed in as part of the assignment to demonstrate that you have participated in the preparation of the assignment. Rough work does not have to be typed – it is rough work – but it does need to have your name on it. Because this is a group assignment all group members need to be able to demonstrate their contribution to the final submission. If you do not hand in your rough work or your rough work does not indicate that you tried to do the work, you may receive a grade lower than that of other group members.

SCMN 3320 (Winter 2015) Inventory Assignment Page 1 of 6