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5502 Discussion Questions for Cases Spring 2012 Blanchard Case (EQO Application) Blanchard Importing and Distributing is a liquor distributor and bottler. They are updating the inventory control and production planning system. A student intern doing the work discovers that not only is the production planning system being ignored but that there should be changes made to the systems. Question to answer: 1) Correct the EOQ model for each of the five items mentioned in the case. How do the corrected figures compare with the calculated values from 1969 and with the productions runs from June of 1972? The original EOQ model grossly overestimated the set-up costs because several factors were included in the calculation of S that shouldnt have been. For example, the blending costs, ranged from $1.15 to $3.24 for the various types of liquor. However, these costs should have all been entered as zero because those functions were a fixed labor cost by salaried employees. Changing these values resulted in a decrease of S from about 74 to 6.25. The unit cost should have also excluded any costs from tax or duties because those taxes are charged after the sale. Additionally, the interest rate should not have been used when calculating K. Instead, the 20% before-tax return on wine merchandising should have been used. These changes resulted in the EOQ changing from a low of 137 and a high of 327 in 1969 to a low of 67 for rum to a high of 191 for rum in 1972. Also, the ROP changed from a low of 137 and a high of 327 in 1969 to a low of 30 for rum to a high of 165 for vodka in 1972. See charts below for additional comparison. The production runs of 1972 have a higher, more variable demand than those of 1969. Corrected EOQ/ROP Demand 2455 1421 800 3096 449 Setup Blending cost 0.00 0.00 0.00 0.00 0.00 Size changeover cost 0.00 0.00 0.00 0.00 0.00 Label changeover cost 6.25 6.25 6.25 6.25 6.25 Order processing cost 0.00 0.00 0.00 0.00 0.00 Total 6.25 6.25 6.25 6.25 6.25 Unit Cost Materials cost 2.20 2.35 5.73 3.79 4.01

Bottling labor Fixed overhead allocation Variable overhead Customs duty Federal distilled spirits tax Federal rectification tax Total Carry cost percentage Cost of capital Other carrying cost Total EOQ ROP Old EOQ/ROP Demand Setup Blending cost Size changeover cost Label changeover cost Order processing cost Total Unit Cost Materials cost Bottling labor Fixed overhead allocation Variable overhead Customs duty Federal distilled spirits tax Federal rectification tax

0.10 0.92 0.50 0.00 0.00 0.00 3.72 20.00% 2.50% 22.50% 191 165

0.10 0.92 0.50 0.00 0.00 0.00 3.87 20.00% 2.50% 22.50% 143 96

0.10 0.92 0.50 0.00 0.00 0.00 7.25 20.00% 2.50% 22.50% 78 54

0.10 0.92 0.50 0.00 0.00 0.00 6.07 20.00% 2.50% 22.50% 180 208

0.10 0.92 0.50 0.00 0.00 0.00 5.53 20.00% 2.50% 22.50% 67 30

2455 1.15 8.85 11.78 51.43 73.21 2.20 0.10 1.31 0.50 0.00 25.20 0.00

1421 1.08 8.85 11.78 51.43 73.14 2.35 0.10 1.31 0.50 0.00 25.20 0.00

800 3.24 8.85 11.78 51.43 75.30 5.73 0.10 1.31 0.50 1.55 27.09 0.00

3096 2.62 8.85 11.78 51.43 74.68 3.79 0.10 1.31 0.50 0.00 27.09 0.76

449

2.33 8.85 11.78 51.43 74.39

4.01 0.10 1.31 0.50 0.00 25.20 0.00

Total Carry cost percentage Cost of capital Other carrying cost Total EOQ ROP

29.31 9.00% 2.50% 11.50% 327 165

29.46 9.00% 2.50% 11.50% 248 96

36.28 9.00% 2.50% 11.50% 170 54

33.55 9.00% 2.50% 11.50% 346 208

31.12

9.00% 2.50% 11.50% 137

30

2) What are the disadvantages of the formal EOQ/ROP system and the actual system used for scheduling bottling runs at Blanchard? Which systems do you prefer? What improvements can you recommend? The disadvantage of the EOQ/ROP system is that the system requires perpetual inventory analysis, which is expensive and difficult to maintain. Also, you must establish a new EOQ/ROP every period, because it doesnt reflect changes in demand. The disadvantage of Blanchards system is that by having a safety stock designed to maximize service levels, Blanchard is tying up its capital resources in inventory. These capital resources could be used more efficiently to finance growth of the business or to invest in production machinery that would increase capacity. I recommend using the EOQ system because it smoothes out the restocking process and creates better customer service because running out of inventory is less likely. McLeod Moters This is an inventory problem. Students should look into where the inventory is in the systems and why it is there and what can be done about it. 1) How long does it take for one batch of BN-88-55s to go through the McLeod manufacturing process? It takes 5.1 weeks to do all of the 5 steps, as well as the set-up and waiting times. Here are all of the waiting times that were added together to get 5.1 business weeks:

 1 Day Set-up machine (30 min) 1. Tap holes, Concave a. Inform Supervisor b. Inform Production Control c. Issue work order 3 Days 1 Day Move full bin (10 min) Move bin to next step (10 min) Set-up machine (30 min) 2. Tap 4 Holes, Convex a. Inform Supervisor b. Inform Production Control c. Issue work order 3 Days 1 Day Move full bin (10 min) Move bin to next step (10 min) Set-up machine (30 min) 3. Turn Convex Face a. Inform Supervisor b. Inform Production Control c. Issue work order 3 Days 1 Day Move full bin (10 min) Move bin to next step (10 min) Set-up machine (30 min) 4. Turn Concave Face a. Inform Supervisor b. Inform Production Control c. Issue work order 3 Days 1 Day Move full bin (10 min) Move bin to next step (10 min) Set-up machine (30 min) 5. Inspect & Finish

a. Inform Supervisor b. Inform Production Control c. Issue work order Move bin (10 min) 2) What is the minimum work-in-process inventory that McLeod could have and how much does it have? What would a reasonable size be? Using Littles Law, I=X*CT The throughput is one batch every 20 hours, as stated in the footnotes of the case. 20 hours is equivalent to of work-week. So inventory is equal to 5.1 weeks*2 batches per week, or 10.2 batches. 10.2 batches of 1,248 equals 12,730 individual units. The minimum WIP would be 3.1 min*(2,500 units/2400 min) = 3.15 units. A reasonable WIP size should be smaller than the current 12,730 units. The process of standardizing the units should have reduced the number of WIP needed to meet demand, but instead the number increased. The waiting time should not be as high, which is driving the number of units in production up to unreasonable levels. Polaroid (quality and SPC) 1) What is the magnitude of cost of quality problems at the R2 plant? How effective were its past procedures for quality management? The defect levels are now 10 times higher after Project Greenlight because they have risen from 1% to 10%. Additionally, out of 45 samples, 20 had a finger height that was out of control. Its past procedures were ineffective, because they were rejecting samples that had excess regents, when that wasnt affecting customer service. Sampling was also destroying perfectly good products and creating excess scrap, when process control could eliminate the need for so much testing. 2) Using the data in the exhibits construct and analyze the appropriate SPC charts. What conclusions should Rolfs draw? Because the X Bar Bar chart for finger heights has data points for August that lie outside of the UCL and LCL As a result, finger height is out of control. Finger heights are being produced inconsistently by the operators because some of the operators (A) are creating units that fall above the UCL while others units fall below the LCL (C). See the following charts for the ranges and averages of both finger height and pod weight.

 Finger Heights - X bar bar

x bar bar 2.0603 R bar 0.3099 UCL 2.2099 LCL 1.911 Pod Weight - X bar bar

x bar bar UCL

2.8052 2.837

R bar 0.0671 LCL 2.772

Finger Height - R bar

x bar bar 2.0603 UCL 0.621 Pod Weight - R bar

R bar 0.3099 LCL 0

x bar bar UCL

2.8052 0.134

R bar 0.0671 LCL 0

 National Cranberry (process Analysis) 1) Analyze the process fruit operation at Receiving plant #1.
Weighing & Grading Dumping

Dry Bins: 4000 BBLs

Wet Bins: 1200 BBLs

Multi-purpose Bins: 2000 BBLs

Destoning: 1500 BBLs

Dechaffing: 3000 BBLs

Destoning: 3000 BBLs

Dechaffing: 1500 BBLs

Drying: 600 BBLs

Separating: 1200 BBLs

Bulking & Bagging

The bottleneck is the drying machines at a capacity of 600 BBLs. 2) What recommendations, both short and long term, would you make to Mr. Schaeffer? In the long term, I recommend that Shaeffer make capital investments in more resources. If he adds 3 more dryers ($60,000 each), then he can increase capacity to 1200. In that case, the new bottlenecks would be separating and the

number of wet bins. He could then increase capacity even further to 1500 if he converted two of the dry bins to wet bins ($10,000 each) and bought another separator. This is cost effective because National Cranberry makes $38.24 per barrel. So if they can increase capacity by 900 barrels, that is an additional $34,416 in revenue per day. Thus, the investment will pay for itself quickly. In the short term I would open the plant earlier in the day. If there is more time for the cranberries to make it through the process, there will be fewer cranberries that have to sit overnight before they finish processing.