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Technology Operations & Management Case: Mcleod Motors Ltd. WAC Submission

McLeod Motors implemented a new end shield called BN-88-55 that consolidated 15 different end shields into a single part. This was expected to lower costs through standardization. However, inventory levels increased rather than decreased as expected. Sue Reynolds needs to investigate why inventory is higher than the warehouse space can support. The document analyzes McLeod's production process and calculates that switching to the new end shield increased the standard batch size from 2475 to 2496 units per week. This raised the annual inventory level from 66,825 to 67,392 units, exceeding the target of 65,000 units. Reducing the buffer stock by one week could lower annual inventory to 66,144 units and free up needed warehouse space while still meeting

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Abdul Khan
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2K views6 pages

Technology Operations & Management Case: Mcleod Motors Ltd. WAC Submission

McLeod Motors implemented a new end shield called BN-88-55 that consolidated 15 different end shields into a single part. This was expected to lower costs through standardization. However, inventory levels increased rather than decreased as expected. Sue Reynolds needs to investigate why inventory is higher than the warehouse space can support. The document analyzes McLeod's production process and calculates that switching to the new end shield increased the standard batch size from 2475 to 2496 units per week. This raised the annual inventory level from 66,825 to 67,392 units, exceeding the target of 65,000 units. Reducing the buffer stock by one week could lower annual inventory to 66,144 units and free up needed warehouse space while still meeting

Uploaded by

Abdul Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Technology Operations &

Management
Case: Mcleod Motors Ltd.
WAC Submission

Prepared by: Abdul Samad Khan


(08975)
Submitted to: Mr. Kamran
Mumtaz
Date: 23rd October 2014

Executive Summary
McLeod Motors LTD is a successful company with numerous
customers in the original equipment manufacturer (OEM) market.
These customers use motors as components in large products and
in the replacement market. They have made over 40 models of
electronic motors. During the previous year McLeod engineers have
recommended that the company minimize the different number of
end shields and replace these different end shields with a new end
shield called BN-88-55. The new end shield replaces 15 end shields
in one motor product line of motors. Sue Reynolds, plant manager at
McLeod Motors LTD factory realized that this new product would
result in lower manufacturing costs, make higher sale and lower
inventories; however, the results that the vice president expected to
see at the end of the period did not occur. McLeod Motors LTD has
too much inventory and the warehouse does not have enough space
for all their inventories such as: Raw Materials, Work in process,
finish goods and supplies. Sue Reynolds needs to investigate the
reasons why the warehouse does not have enough space and what
Macleod has to do in order to decrease their inventory and lower the
cost of keeping the inventory in the warehouse. Sue Reynolds has to
consider what action to take and what should tell John Ingram.
Process Flow

WIP

Drilling

WIP

Milling

WIP

Turning

FP

Assembly

Above flow diagram represents the process flow at Mcloed, where


there is a Work-in-process inventory after every process except for
assembly. One the product has passed from the assembly, its stored
in the inventory (ware house) as a finished good.

Operations

Departm
ent

Machine

Tap 4 holes,
concave face
Tap 4 holes,
convex face
Turn convex
face
Turn concave
face
Inspect and
Finish

Drilling

Drill press

Pieces per
machine
hour
75

Pieces per
machine
per minute
1.25

Machines
available in
department
9

Drilling

Drill press

75

1.25

Turning

Lathe

100

1.67

Turning

Lathe

120

2.0

Inspection

Work bench
and hand
tools

150

2.5

Through put time: 8.67 min


Cycle Time: 2.5 min

Analysis:

Since the company has decided to reduce the number of


product from a variety of 36 SKUs to 5 types, Mcloed is going
towards Standardization to increase the volumes and
reduce the cost and customization.
All the machines are assembled in way to facilitate the
process, so it is a processed based Batch process
Working hours = 8 hours x 5 Days = 40 hours per week
Supply market:
o OEM (Original equipment manufacturer) was the main
customer with known annual forecast
o Secondary customer was replacement market with a
more fluctuating short time forecast

Flexibility

Quality

Speed

Cost

Calculation:

Annual demand = 2500 (weekly) x 52 (weeks) = 130,000


units
Actual cost per unit = 5.28 (direct cost) + 0.77 (direct Labor)
+ 2.31 (Overhead cost) = $8.36 per unit
Selling price= 8.36 + 20% profit = $10
Weekly demands:
o Average weekly demand= 165 (units) x 15 (shields) =
2475 units per week
o Actual weekly demand = 2500 units per week
o Standard weekly output = 1248 (units) x 2 (batches) =
2496 units per week
Direct Labor time on one BN-88-55s = 3.1 min

Standard Demand and Inventory Analysis:


Order Size (Q) = 2500 per week
Unit Cost (C) =$8.3
Cost of Ordering (S) = 10 min [3.1 min = $0.77] + unit cost=
$7.45 + $8.3 =$15.75
Annual Demand (R) = 2500 * 52 = 130,000 units
Annual inventory carrying costs (K) =?
Q=(2RS/KC)
2500=(2*130000*15.75)/(K*8.3)
K=7.86% (annualinventorycarryingcostasafractionofunitcost)
Annual Inventory Cost = KCQ/2
= (.0786*8.3*2500)/2 = $815
Standard annual Inventory (Q/2)*52 = 1250*52= 65000 units per
year
Actual Demand and Inventory Analysis (Before BN-88-55):
Order Size (Q) = 15 * 165 units = 2475 units per week
Unit Cost (C) =$8.3
Cost of Ordering (S) = 10 min [3.1 min = $0.77] + unit cost=
$7.45 + $8.3 =$15.75
Annual Demand (R) = 2475 * (52+2) =133,650 units
Annual inventory carrying costs (K) =?

Q=(2RS/KC)
2475=(2*133650*15.75)/(K*8.3)
K=8.28% (annualinventorycarryingcostasafractionofunitcost)

Annual Inventory Cost = KCQ/2


= (.0828*8.3*2475)/2 = $850.5
Additional inventory cost = $850.5 + 25%
= 815 + 212.6
= $1063.1
Standard annual Inventory (Q/2)*54 = 1237.5*54= 66,825 units per
year
Actual Demand and Inventory Analysis (After BN-88-55):
Order Size (Q) = 2496
Unit Cost (C) =$8.3
Cost of Ordering (S) = 10 min [3.1 min = $0.77] + unit cost=
$7.45 + $8.3 =$15.75
Annual Demand (R) = 2496*54= 134,784 units
Annual inventory carrying costs (K) =?
Q=(2RS/KC)
2496=(2*134784*15.75)/(K*8.3)
K=8.21% (annualinventorycarryingcostasafractionofunitcost)
Annual Inventory Cost = KCQ/2
= (.0821*8.3*2500)/2 = $850.5
Additional inventory cost = $815 + 25%
= 815 + 212.6
= $1063.1
Standard annual Inventory (Q/2)*54 = 1248*54= 67,392 units per
year

Conclusion:
It can been seen through the calculation that before BN-88-55, the
batch size was of 2475 units per week, which was giving us an
annual inventory of 66,825 units per year. When we increased our
batch size to 2496 according to new process, our annual inventory

increased to 67,392 units. There is an increase of 567 units in the


inventory, which adds to additional 25% of inventory cost.
We can see that our actual required inventory should be 65000
units, but instead we are producing a surplus of 2392 units by keep
a buffer of two week.
Sue can suggest a decrease in the buffer by a week. This will allow
them a reduction in inventory by 1248 unit. The new inventory
number will be 66,144 units. Through this method then can also
meet the immediate demand of the replacement market segment as
well.

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