Introduction
Space Age Furniture Company produces two major products, Gemini TV stand and Saturn Microwave stand. However, both of these products require a single common product, 3079. This material can only be produced on one machine and only one machinist knows how to operate it. This is one issue that results in frequent overtime for the machinist. Additionally, this material (3079) is used in both the subassemblies for Gemini TV stand and Saturn microwave stand. The major problem with the subassembly is that the minimum lot size is 1000 for both the subassemblies. Higher lot size is increasing the inventory holding cost for the company. Space Age Furniture Company managers do not know which one is more important; reduction of overtime cost, inventory holding cost or lot size. This essay will analyze the case using manufacturing concepts and process theories and will propose the most important measure the management should take up to reduce cost and increase flexibility.
Two major products of Space Age Furniture Company are Gemini TV stand and Saturn Microwave stand. The demand for Gemini TV stand and Saturn microwave stand are shown in the table below:
Gemini TV stand requires one unit of subassembly 435 and Saturn Microwave stand requires subassembly 257. However, the production of both the assemblies should be done in the minimum batch size of 1000. Additionally, there is one-week production lead time for the subassemblies. Therefore, the demand for Gemini TV stand or Microwave stand in week X should trigger a demand for subassemblies one week in advance (week X-1). The actual dependent demand of subassembly 435 and subassembly 257 are shown below:
The main problem with the above schedule is that it is not feasible to produce below 1000 (minimum lot size for subassemblies) for both subassembly 257 and subassembly even though the requirement is less. This means that if the company does not want to lose any demand, it needs to produce the subassembly in advance in some cases and store. Including the 1000 lot size constraint, the production schedule for 257 and 435 subassemblies are as shown below:
If the above production schedule has to be followed, then the demand for part 3079 is as follows:
Current Cost Situation: Overtime and Inventory Holding Cost
As per the above MRP plan, the weekly production plan is lumpy as shown in the graph below:
Assuming that Space Age Furniture Company is keeping inventory at subassembly level, the cost of holding inventory of subassembly is as below:
Note: inventory holding cost per unit/week =$0.75
Therefore, because of 1000 lot size, the total inventory holding cost is = $4,200
Additionally, because of the lumpy demand of 3079, Space Age Furniture Company will incur overtime cost on the Lathe machine. Overtime cost for production of 3079 is shown below:
Note: unit production time =0.03 hour/unit and excess overtime cost = $1/hour (50% premium over normal rate of $22/hour)
Therefore, total Inventory and overtime cost= $660+$4200 = $4860
Type of Production processing
There are different types of production processing.
Job shops are typical machine shops that can handle job production of custom or semi-custom customer orders. In a job shop, orders typically move from one type of machine to another for further processing. In this case, lathe machine for the production of 3079 is an example of job shop process.
Batch processing, on the other hand, is a type of constraint in a manufacturing process. Job Shop can have a batch constraint. In this case, the 3079 and subassembly machining process is an example of a job shop. However, the subassembly has an additional constraint of batch size (lot size of 1000)
In a continuous production process, the flow of manufacturing parts is continuous. Textile, steel and food sector are some of the examples of continuous manufacturing process.
Space Age Furniture Manufacturing is a typical job shop production process with batch constraint at subassembly level.
Possible Improvements
Space Age Furniture company can use several different strategies to reduce the cost.
1) Firstly, if it can reduce the minimum lot size of the subassemblies, then the inventory holding cost will come down. In the below section, we will show how the inventory cost will come down if the lot size is reduced from 1000 to 500.
2) As there is no lead time between 3079 production and subassembly production, keeping inventory at 3079 will reduce inventory holding cost as the cost of holding 3079 inventory is $0.25/unit/week compared to $0.75/unit/week for subassemblies.
3) Finally, a constant production strategy can be used for the subassemblies instead of lumpy production. Total subassembly production can be 1000 every week (either 435 or 257 subassemblies) irrespective of demand pattern. This will reduce the overtime cost required for 3079 productions.
Next sections will touch upon each of the above recommendations and show how it will reduce the cost.
Lot Size Reduction
Let’s assume that by changing the manufacturing process of the machines, Space Age manufacturing process was able to reduce the lot size from 1000 to 500. Let’s see how it can improve the inventory cost at subassembly level.
Additionally, by reducing the lot size the overall 3079 production also has become more stabilized. As a result, the overall overtime premium payment has reduced from $660 to $110.
Inventory at 3079 Level and not at subassembly level
As discussed above, keeping inventory at 3079 level is less costly than keeping inventory at subassembly level. Therefore, it makes more sense to keep inventory at 3079 level and then use it as and when the demand for the subassembly is generated. However, this is only possible when the subassembly is a continuous manufacturing process.
This is not an implementable solution as Space Age Furniture Company has a job shop structure where the subassembly lot size is 1000. If that can be reduced to 1 (continuous manufacturing), then and only then keeping inventory at 3079 will be possible and will be beneficial. Otherwise, Space Age Manufacturing Company will end up keeping inventory at both 3079 level and subassembly level.
It can be beneficial if keeping inventory at 3079 level reduces the one week lead time for the subassemblies (it passes on to 3079). Then it makes sense to keep the inventory at 3079 level. Then we will have inventory at both subassemblies as well as 3079 level. The cost calculation is shown below:
As can be seen from the above table that the subassembly inventory cost has come down from $4,200 to $3,075. However, there is now an additional cost incurred for holding 3079 inventory worth $1,400. Therefore, the overall inventory holding cost has actually increased (from $4,200 to $4,475)
Therefore, this strategy currently is not recommended if the lot size constraint at subassembly level cannot be reduced.
Level production Strategy
Although level production strategy is not always the best solution from the perspective of inventory holding cost, this strategy is used to reduce the overtime cost. Level production strategy also helps the companies plan better for resources. In this case, the machinist for 3079 has a lumpy work schedule. Some weeks he works 60 hours and in some weeks the 3079 lathe machine is not running at all. This not only increases the overtime cost, but also adds to employee dissatisfaction. Let’s assume that only in the first week, the production of subassemblies will be 2000 (to meet the week one demand as there is no inventory). From second week onwards, every week subassembly production will be 1000 (either 257 or 435). This will make the production schedule for 3079 less lumpy and the overall overtime will reduce. The overall cost calculation is shown below:
As can be seen from the above table that level production strategy has successfully reduced the overtime cost from $660 (base case) to $220 (because of week 0). However, using this strategy, the inventory holding cost has gone up from $4,200 (base case) to $5,700. Therefore, overall cost has increased in this case. However, this method does not include the opportunity cost lost if the 3079 machinist leaves the organization in case the base case strategy is continued.
This strategy can only be used if the lot size requirement can be improved.
Final Recommendation and Suggestion
As discussed in the previous sections, Space Age Furniture Company can use different strategies. It can use a level production strategy to reduce overtime cost for the machinist in machine 3079. However, using this strategy will substantially increase the inventory holding cost of subassemblies. This strategy can only work well if the lot size at subassembly level can be reduced.
Instead of keeping inventory at subassembly level, Space Age Furniture Company can try to keep inventory at 3079 level. In a continuous production environment, this would have reduced the inventory holding cost substantially. However, due to lot size constraint at subassembly level, Space Age Furniture Company will end up having inventory at both subassemblies as well as 3079 level.
Therefore, before any other strategy, it is important for the company to implement measures to reduce the lot size constraint at subassembly level. Any other strategies will only be effective if the lot size constraint is somehow relaxed.
References
Stevenson, W. (2009). Operations management. Boston: McGraw-Hill/Irwin.
Andre, J. (2012). Manufacturing management. Delhi: Orange Apple.
Krajewski, L., Ritzman, L., & Malhotra, M. (2007). Operations management. Upper Saddle River, N.J.: Pearson Prentice Hall.
Kuhpfahl, J. & Bierwith, C. Job shop scheduling with consideration of due dates.
Khan, W., Raouf, A., & Cheng, K. (2011). Virtual manufacturing. London: Springer.
