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University of Houston

INDE 6361

Production Planning and Inventory Control

Dr. Eylem Tekin

Case Study: Athletic Knit

Spring 2016 – Group Project

February 25, 2016


Case Study: Athletic Knit

1) Why is Daniel so concerned about his inventory position? Why does he need to have inventory at
all? Explain in at most 5 sentences.

● To keep up with the high levels of service that customers expect.


● To tighten inventory to remain competitive in global economy.
● To balance peak season demand during the third quarter of the year with the available knitting
production capacity.
● To minimize the potential cost of obsolescence in a highly seasonal business.
● To achieve quick deliveries faster than its competitor.

2) What is stopping Daniel from building everything as it is ordered by the customer?

When stock-outs occur, there is a significant increase of lead time from an average of 4 days to 4 weeks.
In order to keep up with high levels of service and short lead time for customers, AK has to maintain
high inventory levels.

3) Perform a capacity analysis for AK by filling in the following table using the data provided in the
case.

Table-1 Capacity analysis for AK


Season Weeks %Sales Demand Capacity CU% Capacity CU%
with OT with OT
July 15-Aug 14 4 10% 8,517 8,598.46 99.05% 10,748.08 79.24%
Aug 15-Nov 1 11 44% 37,474 23,645.77 158.48% 29,557.21 126.78%
Nov 15-Dec 14 4 10% 8,517 8,598.46 99.05% 10,748.08 79.24%
Dec15-July 14 33 36% 30,660 70,937.31 43.22% 88,671.63 34.58%
Total 52 100% 85,168 111,780.00 76.19% 139,725 60.95%

The total annual demand is 85,168 as shown in Exhibit 4. The different seasonal demands are
differentiated by their sales percentages. For example, for period July 15 to August 14, the demand is
total demand*sales percentage=85,168*10%=8,516.8≈8,517

Since AK had a capacity to produce 460 jerseys per eight-hour shifts on 9 machines, the capacity for
period July 15 to August 14 is
(243/52)days*No. of weeks*capacity per shift=460*18.69=8,598.46

For capacity with overtime of the same season, overtime working days are used in this equation:
Capacity with OT=(1+2/8)*(243/52)days*No. of weeks*capacity per shift=460*23.37=10,748.08

Capacity Utilization measures the rates at which the potential demand levels are being met.

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Case Study: Athletic Knit

CU%=Demand/Capacity*100%

4) What are your observations from the table that you constructed in part 3)? Is there slack
production capacity? When?

The slack production capacity happens during Dec15-July 14, when the capacity utilization is 43.22%.
This slack causes the peaked inventory in the middle of May. Constant production rate and low demand
during Dec 15-July 14 causes high inventory levels at that time.

5) How much inventory does AK have in a year?

The annual inventory will be 111,780 - 85,168 = 26,612 with full capacity production.

6) What are the reasons for AK’s high inventory levels?

Constant production rate and low demand during Dec 15-July 14 causes high inventory levels at that
time. The production rate after the peak time should be reduced to manage the inventory.

7) Based on the data provided in Exhibit 4, perform an ABC analysis. Clearly explain your approach.

Table-2 ABC analysis for products


Accumulative Inventory
Style Code Annual Demand inventory Percentage(%) Class
270 7275 7275 8.541940635
620 6912 14187 16.65766485 A

720 5535 19722 23.15658463


830 4587 24309 28.54241029
750 4262 28571 33.54663723

230 3415 31986 37.5563592

340 3352 35338 41.49210971 B

500 3258 38596 45.31749014

490 2957 41553 48.78945144

330 2798 44351 52.0747229


440 2648 46999 55.18387188
310 2324 49323 57.91259628 C

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Case Study: Athletic Knit

770 2315 51638 60.63075333

220 2286 53924 63.31486004

410 2211 56135 65.9109055

320 2027 58162 68.29090738

290 1832 59994 70.44195003

300 1595 61589 72.31471914

880 1533 63122 74.11469096

450 1525 64647 75.90526958

400 1524 66171 77.69467406

580 1490 67661 79.44415743

870 1477 69138 81.17837686

250 1474 70612 82.90907383 C

810 1472 72084 84.63742251

200 1438 73522 86.32585008

600 1337 74859 87.89568852

520 1200 76059 89.30466842

210 1152 77211 90.65728912

380 1115 78326 91.96646628

740 1111 79437 93.27094683

630 1002 80439 94.44744505

350 748 81187 95.32570919

550 743 81930 96.19810257

820 738 82668 97.06462521

660 728 83396 97.91940635

680 462 83858 98.46186361

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Case Study: Athletic Knit

540 456 84314 98.99727597

460 439 84753 99.51272779

240 415 85168 100 C

Total 85168

Lacking individual product price, we could assume the unit cost of all types of products are the same.
Hence the inventory can be divided based on annual volume rather than annual dollar volume. Sorting
the annual demand of each style in descending order, the top tier also represents the highest dollar
volume. So we can define the first 20% of inventory as class A, and the following 30% as class B, and the
last 50% as class C.

8) If AK must build inventory, how do they determine the ideal production batch(lot) size? Would the
answer differ for the peak and off-season?
Suppose that you will use the EOQ model to answer these questions by following the step belows:

a) Compute the cost per jersey, set up cost and the holding cost.

c: the cost per Jersey = Labor cost +Material cost + dyeing cost
$18.5 * 8 hr * 3 employees / 460 + $9.5 / 2.5m * 1.5m + $3 / 2.5m * 1.5m = $0.965 + $5.7 + $1.8 =
$8.465 per jersey

A: the set up cost = average three labor hours


$18.5 * 3 hr = $55.5 per set up

h: the holding cost (10%)


$8.465 * 10% = $0.8465 per jersey

b) Based on your ABC analysis, compute the EOQ for each class considering the annual demands.

𝟐𝑨𝑫
𝑸∗ = √ (c=$8.465 per jersey, A=$55.5 per setup, and h=$0.8465 per jersey)
𝒉

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Case Study: Athletic Knit

Table-3 EOQ computation based on ABC analysis


Class Annual demand (D) Economic Order Quantity (EOQ)

A 19,722 2 × 55.5 × 19,722


𝑄∗ = √ = 1,608
0.8465

B 24,629 2 × 55.5 × 24,629


𝑄∗ = √ = 1,797
0.8465

C 40,817 2 × 55.5 × 40,817


𝑄∗ = √ = 2,313
0.8465

c) Based on your ABC analysis, compute the EOQ for each class for peak season and off season,
separately.

𝟐𝑨𝑫
𝑸∗ = √ 𝒉
(c=$8.465 per jersey, A=$55.5 per setup, and h=$0.8465 per jersey)

Table-4 EOQ computation based on ABC analysis for peak season and off season
Class Annual demand (D) Economic Order Quantity (EOQ)

Peak-season 2 × 55.5 × 8,678


8,678 Q∗ = √ = 1,067
(44%) 0.8465

A
Off-season
11,044 2 × 55.5 × 11,044
(56%) Q∗ = √ = 1,203
0.8465

Peak-season
10,837 2 × 55.5 × 10,837
(44%) Q∗ = √ = 1,192
0.8465
B
Off-season
13,792
2 × 55.5 × 13,792
(56%) Q∗ = √ = 1,345
0.8465

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Case Study: Athletic Knit

Peak-season
17,959 2 × 55.5 × 17,959
(44%) Q∗ = √ = 1,535
0.8465
C
Off-season
22,858 2 × 55.5 × 22,858
(56%) Q∗ = √ = 1,731
0.8465

d) What do you observe from your results for parts b) and c)?

Table-5 EOQ comparison of parts b) and c)


Total EOQ of
Economic Order Quantity Economic Order Quantity
Class Period Peak and Off
(EOQ) (EOQ)
season

Peak-season 1,067
A 1,608 Off-season 2,270
1,203
Peak-season 1,192
B 1,797 Off-season 2,537
1,345
Peak-season 1,535
C 2,313 Off-season 3,266
1,731

For all classes, the total EOQ of peak and off-season are greater than the EOQ of the specific class.
Further cost analysis are conducted below in order to analyze how EOQ impacts on the total cost.

Total Cost =
(c=$8.465 per jersey, A=$55.5 per setup, and h=$0.8465 per jersey)

For example, the total cost of Class A in part (b) will be


𝟏,𝟔𝟎𝟖∗𝟎.𝟖𝟒𝟔𝟓 𝟓𝟓.𝟓∗𝟏𝟗,𝟕𝟐𝟐
Total Cost= + + 𝟖. 𝟒𝟔𝟓 ∗ 𝟏𝟗, 𝟕𝟐𝟐 =168,308.02
𝟐 𝟏,𝟔𝟎𝟖

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Case Study: Athletic Knit

Table-6 Total cost analysis of parts b) and c)


Class Cost Period Cost

Peak-season $74,359.54
A $168,308.02 Off-season
$94,508.86
Peak-season $92,742.25
B $210,005.73 Off-season
$117,889.71
Peak-season $153,326.04
C $347,474.28 Off-season
$194,954.42
Total Cost $725,788.02 / $727,780.81

The total cost of all classes is $725,788.02, and the one with peak and off season is $727,780.81, which is
increased by 0.27%. The total EOQ for all classes is 5,718, and the one with peak and off season is 8,073,
which is increased by 41.19%. So the total cost is relatively insensitive to the changing EOQ.

9) How do AK’s inventory levels change if the results of the EOQ model are implemented?

For example, form July 15 to August 14,

In order to satisfy the seasonal demand, we use EOQ*rational number of order times.

Table-7 Inventory levels change with EOQ model


Capacity EOQ
Season Weeks Demand Capacity Inventory EOQ EOQ Production
with OT Inventory
July 15-August 14 4 8,517 8,598 10,748 81 1,055 1,055*8=8,440 -77
Aug 15-Nov 1 11 37,474 23,646 29,557 -7,917 2,212 2,212*17=37,604 130
Nov 15-Dec 14 4 8,517 8,598 10,748 81 1,055 1,055*8=8,440 -77
Dec 15-July 14 33 30,660 70,937 88,672 40,277 2,001 2,001*16=32,016 1,356

By using the EOQ, there will be no backorders from the peak period which the period of July-Aug and
Nov to Dec endures some backorders. Compared to the previous inventory level with a constant
production rate, the implementation of EOQ achieves significantly on the inventory level when dealing
with the peak period.

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Case Study: Athletic Knit

10) What is the alternative to building inventory and how much this option cost AK?

c: the cost per Jersey with 11 machines= Labor cost +Material cost + dyeing cost
$18.5 * 8 hr * 4 employees / 562 + $9.5 / 2.5m * 1.5m + $3 / 2.5m * 1.5m = $1.053 + $5.7 + $1.8 =
$8.553 per jersey

h: the holding cost (10%) with 11 machines


$8.553 * 10% = $0.8553 per jersey

If we add two machines, the inventory levels will significantly increase, leading to more cost on holding
and labor. So the investment is not recommended.