The Business School

University of Jammu, Jammu

MBA – IInd SEMESTER

Term End Assignment

Course No. 206

Title: Operation and Material Management
Max Marks: 20

## The Assignment consists of 4 Cases. All Cases are compulsory.

Please answer the questions provided with the case accordingly.
Each Case carries equal marks (5).

## Write the answers in A4 size ruled sheets with BLACK pen

neatly. All sheets should have your Name and Rollno. on top of
every sheet. Further, all pages should be properly numbered.

##Once complete, send me one single scanned pdf file through

email and message me as well whenever you mail me the
assignment.
 Honda's Mixed Model Assembly Lines
Honda has two major car manufacturing facilities in
Japan-one at Sayama, north of Tokyo, and the other
at Suzuka, west of Nagoya. The Sayanfa plant is the
oldest one and its two assembly lines can make up
to 600,000 vehicles a-year. Suzuka's three assembly
lines have a maximum capacity of around 800,000
vehicles a year. The production lines at both the
plants are capable enough of making various models
of cars simultaneously. For instance, at Sayama,
seven types of cars can be assembled on the same
assembly line-the basic Accord, Prelude, and
Legend, the two-door Legend, the Accord-derived
Accord Inspire, Vigor, and Ascot. The main
advantage of the mixed model ·assembly line is that
the declining demand for one model can be counter-
balanced with increased demand for others.
Mixed models on single lines is no longer a
novelty in the automobile industry. Toyota has a
better-known variant of such an assembly line.
Toyota arranges different models one after the other
on the conveyors across the line to balance the
workload for workers and to balance the delivery of
parts. On the other hand, Honda has always
produced in lots (typically in factors of 60 cars) of
one n_1odel at a time and the cars are exactly the
same in all respects (e.g., red Civics, left-hand drive
to be exported to Europe).
At Sayama, several batches of different derivative
Accords may be manufactured before th 1· • started producing automobiles in 1967. Today he
e ine Is
switched to make Preludes for several batches
Models may be switched on the line three or f ·
. . d Th' . our
times in a ay. 1s system allows easy pla · · f to t he exclusive motorcycle plant at Kum arnoto
· . nning o
the supply of parts and at the same tirne ·
'b' I' · f t · d' Offers
fl ex I 1 Ity m manu ac unng accor ing to flu t .
demand patterns. c uat1ng
Unlike the Toyota system of mixing the ca
rs to
accommodate the workers who stay at fixed Work
stations or in fixed groups, the Honda production
sy_
stem reorganizes the workforce, when necessary,
with groups of workers moving about the assembly
line to balance the workload. While designing anew
model, it is kept in mind that it will be produced on
the existing -line with the same fixed equjpment-
across the line. This is necessary to avoid staggering
investments for making changes in the existing
assembly line to suit the design requirements of a
new model.
There are, however, a few limitations of such a
system. For example, the dimensions of the Honda
Accord station wagon, introduced at Honda's
Marysville plant (USA), were designed to fit the
existinglroduction equipment. Hence, the thi rd
· dow
compa11 ent was not very large and the rear win
sloped forward.
Honda is a I so known for the complete
metamorphosis of its Suzuka plant. This plant was
opene d ·m 1960 for manufacturing· motorcycles. Byt
' t he m1'd -1980s, Suzuka became t he h'ig hest outpu
hd
· lant a
motorcycle factory in the world. The same P this
plant manufactures only automobiles after t ly
motorcycle production was transferre d cornpletein
. 1991 (Mair 1994).
 Critically compare the mixed model assembly
1
· lines of Honda and Toyota. Which approach
is better according to you?
Su pose Honda wants to fol low Toyota's
2
· mix_Ped model assembly system of having
different models of cars arranged one after the
other on the assembly Ii ne instead of producing
a batch of a single model for a few hours.
Assume that Honda's City and Accord models
have to be produced on the assembly line and
the chassis of both require a different type of
drilling to be done in the fabrication line. The
drilling time for the City chassis (say, C) is 2
minutes and the Accord chassis (say, A) is 6
minutes. The final assembly requires the
number of C's to be twice the number of A's.
In what balanced sequence should the chassis
of C and A be arranged on the fabrication line
so that C = 2A? Assume eight working hours
per day.
3. What are the disadvantages of mixed model
assembly?
424 Production and Operations Management

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The 'Indian' McDonald's

Come to think of it, McDonald's globally is the It is unfortunate that every year Rs 500 billion
symbol of everything wrong-junk, fast, and worth of food produce is wasted in India, despite
fattening food, and American to boot. In India millions of Indian population deprived of even a
though, McDonald's has been a runaway success single meal in a day. This is mainly because of the
by being very mindful of local sensibilities and tastes. lack of proper infrastructure for storage and
Localization of ingredients, communication, visible transportation under controlled conditions. In India,
company faces, and consciously not cultivating an typically one-third of the 150 million tonne
international image have been the strategies adopted production of fruits and vegetables is lost at the post-
by McDonald's in India. Where else in the world harvest stage. Most of it is attributed to wastage in
would you get a McAloo Tikki or a Maharaja Mac? storage and transportation, mishandling, and the cost
McDonald's is a renowned fast food American chain of intermediaries in the supply chain. McDonald's
started by Ray Kroc in 1955. He established a spent a few years setting up a unique cold chain.
franchising company with brothers Dick and Mac The cold chain is necessary to maintain the quality
of food products and retain their freshness and
McDonald, who owned the famous McDonald's
nutritional value. A cold chain refers to the
hamburger stand in California since 1937. Later in
procurement, warehousing, transportation, and
1961, Ray became the sole owner of McDonald's
retailing of food products under controlled
by buying out the stakes of the McDonald brothers.
temperatures. Setting up the cold chain has involved
In India, McDonald's was started in 1996 in a unique
the transfer of state-of-the-art food processing
way. The company got into a 50:50 joint venture
technology by McDonald's and its international
with Delhi-based entrepreneur Vikram Bakshi's
suppliers to pioneering Indian entrepreneurs, who
Connaught Plaza Restaurants to own and operate
have now become an integral part of the cold chain.
McDonald's restaurants in the northern parts of the
McDonald's has invested a staggering Rs 8 billion
country. On similar lines, Mumbai-based Amit Jatia
in setting up its extensive supply chain in India.
and his Hardcastle Restaurants were chosen for to
Efforts to initiate work on its supply chain started
own and operate McDonald's restuarants in the
way back in 1992, about four years ahead of opening
western parts of India.
its first outlet in 1996. Not only was it difficult to
Interestingly, Bakshi is considering a franchisee
identify the right vendors capable of adhering to
model for McDonald's North India operations by
McDonald's international standards, but also to train
2008 for a deeper penetration into the country's
them to products as per its stringent specifications.
growing food and beverages market. By February For example, the peas have to of a particular
2007, McDonald's-has 61 outlets in North India and dimension, otherwise they protrude from the patty
plans to open another 25 joints in the course of the (if bigger than the standard size) and get burnt.
year and invest Rs 4 billion over the next three years. Similarly, the iceberg lettuces (Band Gobhi in Hindi)
It is also planning to introduce the McCafe concept have to be of a specific weight.
in India by the end of 2007. McDonald's India is All suppliers adhere to Indian government's
planning to increase the number of its restaurants regulations on food, health, and hygiene, while
from 105 to 155 all ove~ the country by the end of continuously maintaining McDonald's recognized
2007. standards. As the ingredients move from farms to
processing- ptants to the restaurant, McDonald's McDonald's buys a third of its 450 tonne annual
quality inspection programme (QIP) carries out requirement from Trikaya. The remaining amount-is
quality checks at over 20 different points in the cold sourced from farms in Ooty (20 per cent), Meena
chain system. Setting up of the cold chain has also Agritech of Delhi (25 per cent),- and Ferracon Farms
enabled it to cut down on operational wastage. in Dehradun.
The company's hazard analysis critical control The association with McDonald's has its share of
point (HACCP) is a systematic approach to food risks because any damage to the crop is borne by
the supplier. It accepts only good quality material,
safety that emphasizes prevention within
so suppliers have to minimize rejections. The lettuce
McDonald's suppliers' facility and restaurants rather
crop is highly vulnerable to weather conditions. It
than detection through inspection of illness or
can fail if there is excess rainfall, heat, or hailstorm.
presence of below quality food. Based on HACCP
McDonald's vast experience comes into play here.
guidelines, control points and critical control points To avoid calamities, McDonald's suggested that
for the company's major food processing plants and lettuce seeds be purchased from McDonald's (which
restaurants in India have been identified. The limits imports them) and planted on raised beds or moved
have been established for those followed by to two other non-flood prone locations eight km and
monitoring, recording, and correcting any deviations. forty km away during the monsoon:
The HACCP verification is done at least twice in a Trikaya has also invested in a cooling plant and a
year and certified. refrigerated vehicle to transport the produce. To avoid
The relationship between McDonald's and its excessive man-handling, the head of lettuces, which
Indian suppliers is mutually beneficial. As is cut at the base, is placed directly onto a tray which
McDonald's expands in India, suppliers get the goes into the refrigerated room. It is stored there till
opportunity to expand their business; have access the next morning when it is sent to the processing
to the latest in food technology and advanced . plant.
agricultural practices; and the ability to grow or to The lettuce is harvested everyday at 6 a.m.,
export. There are many cases of local suppliers packaged and maintained at a temperature of two
operating out of small towns who have benefited degrees celsius in the cooler. It is tr3nspoited by a
from their association with McDonald's India. truck in a compartment maintained at four degrees
celsius. When it arrives at the processing centre, it
Trikaya Agriculture is processed at eight to twelve degrees room
Implementation of advanced agricultural practices temperature. The product and water temperature is
has enabled Trikaya to successfully g!ow specialty one to four degrees and kept for up to a week before
crops such as iceberg lettuce, special herbs, and being dispatched to the distribution centre in Thane,
many oriental vegetables. The farm's infrastructure a north-eastern Mumbai suburb.
features: Lettuce is one of the few products sourced by
• a specialized nursery with a team of agricultural McDonald's from more than one supplier despite
experts; the usual norm of having as few suppliers as possible.
• drip and sprinkler irrigation in raised farm beds According to the company, for a burger in Delhi to
with fertilizer mixing plant; taste the same as in Chennai, the number of suppliers
• pre-cooling room and a large cold room for post should be less. In the case of lettuce, given the
harvest handling; and fragility of the crop, it is always possible for one of
• refrigerated truck for transportation. the suppliers to have a washed-out crop. Trikaya,
 426 Production and Operations Management
with its excess capacity, fills in to maintain the steady
flow of supply. Trikaya sells the surplus produce in
L
the local market for which it gets a better price of Rs
40 to Rs 100 a kg. McDonald's, on the other hand,
leverages the economies of scale to buy the
vegetable at cheaper prices.
Few years back, pests used to devastate the lettuce
crops at Trikaya. Today, with McDonald's help
Trikaya uses the right pesticides during different times
of the pest's lifecycle and inhibits their growth. Every
Monday, the pest scouting data is passed on to
McDonald's office and together they work out a
solution. Due to this collaboration, pest-related
rejections are down to 10 per cent.
Vista Processed Foods Pvt Ltd
Vista Processed Foods produces a range of frozen
chicken and vegetable foods. A world class
infrastructure at their plant at Taloja, Maharashtra,
has:
• separate processing lines for chicken and
vegetable foods;
• capabi Iity to produce frozen foods at
temperature as low as -35 degree celsius to
retain total freshness; and
• international standards, procedures, and support
services.
Vista, with its state-of-the-art plant, provides 20-30
per cent of McDonald's total purchase of processed
food. It deals with 45 suppliers for the 12 products it
supplies to McDonald's, ranging from frozen peas
and assorted vegetables for vegetable patties to
procuring the right quality of birds for the chicken
patty.
The process of freezing a patty after preparation
is quite interesting. A food expert mixes the
vegetables as per McDonald's recipe. It is then mixed
with rice as the binding agent. Once this is fed into
the automated machine, it goes through the motions
of being dipped in batter and then rolled in bread
crumbs and fried a~d frozen; all this in exactly half
an hour. The final outcome is a frozen and patkaged
patty which then has a shelf-l_ife of one year. It is ·
maintained at -18 degree centigrade.
The chicken used in the Chicken McGrill is
supplied by Coimbatore-based Suguna Poultry. It
provides the frozen deboned meat to Vista. In fact
by the time the meat comes to Vista, it has traveled
quite a bit. The eggs are laid in Bangalore. The
hatching and contract farming is done out of Pune.
The bird is processed in Pune before it is deboned
and sent to Vista. The egg hatching and bird killing
cycle takes forty five days and another five days are
used for processing. Vista picks up 70,000 birds a
month from Suguna, which is 20 per cent of its
output.
In order to contain costs, Vista strives to minimize
rejections. After every batch of patties, a quality
assurance expert fries a patty to test it for colour,
appearance, internal texture, and flavour. If it passes
this test on all the parameters, it is ready to be sent
to the distribution centre. If it falls short on even a
single parameter, the entire batch is rejected. By
constant trial and error, rejections are down from
the earlier eight to ten per cent to the current two
percent. The major concerns of Vista in this process
are related to temperature controls.
Dynamix Diary
Dynamix has brought immense benefits to farmers
in Baramati, Maharashtra by setting up a network of
milk collection centres equipped with bulk coolers.
Easy accessibility has enabled farmers to augment
their income by finding a new market for surplus
milk. The factory has:
• fully automatic international standard
processing facility;
• capability to convert milk into cheese, butter/
ghee, skimmed milk powder, lactose, casein and
whey protein, and baby food; and
• stringent quality control measures and
continuous R&D.
Cheese comes in both shredded form and as singles.
While the singles go directly to McDonald's two
distribution centres, the shredded cheese comes to

Vista to be used in a range of concoctions. While
Modern Dairy and Amul provide the paneer, the
cheese is made by Dynamix, which has set up a
separate line for McDonald's. For McDonald's,
Dynamix produces sheets of cheese that are then
cut into eight slices each. It also churns out cheese
singles for biscuit-maker Britannia that are marketed
under the brand name Milkman.
McCain Foods
McDonald's had a troublesome learning experience
in sourcing the right kind of potatoes for its French
fries in India. One of its suppliers, Lamb Weston,
invested heavily in setting up production lines to
process Indian potatoes in the early nineties.
However, with the quality of the potato crop not up
to McDonald's specifications, the project had to be
abandoned.
Having burnt its fingers, McDonald's did not want
to take any chances. It has continued to import
around 1,200 tonnes of potatoes every year for
French Fries from New Zealand. Now, it has
partnered with its main global supplier, McCain
Foods, the world 's largest French fries company.
Together, they are helping Indian farmers grow the
right kind of potatoes. The Indian potato crop was
not as good because farmers used seeds from the
preceding crop. As a result, not only did they have
only one variety of the crop, but the quality was
poor. McDonald's specifications are clear and
unbending-a certain length, high solid content, and
low moisture. Indian potatoes typically have 15-19
per cent solid matter compared to the global standard
of 18-26 per cent. Hence, McCain, a leader in
agronomy, zeroed in on Deesa and Kheda, two
Gujarat towns. It has been helping farmers in these
places with better agronomy techniques, including
irrigation, sowing seed treatment, planting methods,
fertilizer application, and storage. The crop is
improving with 21 per cent sol id content and
McDonald's is now sourcing 350 tonnes of potato
from Gujarat for its wedges. It will take a good three
or four years before the right quality of potatoes (with
24 per ~ent solid content) are grown for French fries.
l
MRP, JIT, and SCM 427
Radhakrishna Foodland
An integral part of the Radhakrishna Group,
Foodland specializes in handling large volumes,
providing the entire range of services including
procurement, quality inspection, storage, inventory
management, deliveries, data collection, recording,
and reporting. The salient strengths of this company
are:
• a one-stop shop for all distribution management
services;
• dry and cold storage facility to store and
transport perishable products at temperatures up
to -22 degree celsius; and
• effective process control for minimum
distribution cost.
Once processed, all the products have a minimum
of 60 days shelf-life, except for buns, which remain
fresh for five days and lettuce, which remains fresh
for three days. To transport around 800 tonnes per
month of varying quantities of some 250 ingredients
from 50 suppliers at varying temperatures, a wider
assortment of trucks than Radhakrishna Foodland
Ltd (RKFL) currently has is needed. However, their
design contributes to lower McDonald's supply
chain costs. Each truck has three levels of variable
refrigeration, and the size of each refrigerated
compartment can be varied according to need.
The use of multi-temperature trucks has reduced
the number of daily deliveries to McDonald's outlets,
which maintain an inventory of 2.5 to 3 days
requirement. If on a particular day, lettuce is needed
more than ice cream, the compartment with the
relevant temperature can be expanded to take in
more lettuce. This flexibility is the key to cost control
in a situation where some perishables such as
tomatoes have to be dispatched daily, while products
such as cheese and buns require replenishment every
two or three days, depending on demand and shelf-
life. RKFL has invested in 24 multi-temperature trucks
which offer three different temperatures-ambient,
chilled, and frozen.
This has no doubt saved on transportation time
and helped RKFL reschedule deliveries based on
428 Production and Operations Management
orders from various outlets. Earlier,· transportation
productivity was 6 to 7 cases per man-hour. This
has gone up to 16 to 17 cases. Moreover, every case
was earlier moved manually from the truck to the
restaurant. Today, trolleys transport four cases at a
time. Even the boxes, which used to be placed
haphazardly as in any godown, are well-aligned
now.
The supply chain is common for both North and
West India managed by Vikram Bakshi and Amit Jatia
respectively. The processed food is taken to RKFL's
two distribution centres at Thane near Mumbai and
Noida near Delhi. The Noida centre also doubles
up as a processing unit.
McDonald's always treats its suppliers as partners
and strives to help them in every possible way.
During its early association with RKFL, it introduced
the supplier to Australia's F J Walker to develop the
distribution system. In 1996, RKFL's distribution
centre had inventories of 35 to 36 days. Now with
more sales and efficiencies, it is down to around 1O
days-about 175 stock keeping units. Dry goods
account for 60 per cent of inventory compared to
20 per cent each of frozen and chilled stuff. This
includes both inbound (those picked up and brought
to the distribution centre) and outbound (which are
taken from distribution centres to the outlets).
There are also systems in place for tracking
demand and supply. Every fortnight, RKFL sends
1. McDonald's has been quite successful in
extending the life of its raw materials by various
innovative methods, which were hitherto
deemed in India as 'perishable commodities'.
The earliest consumption of these perishable
commodities akin to the )IT concept has been
defied by McDonald's in a market which prefers
fresh food. Discuss.
2. It would have been much more cost effective
and convenient if McDonald's would have
pursued a local sourcing strategy rather than the
rolling projections to the suppliers for the next three
fortnights as every purchase order is placed three
weeks in advance. The objective is to minimize the
conversion of raw materials into finished products.
This helps suppliers to control their inventory as well.
A big hurdle was the accurate forecast of product
movement. Earlier product movement was tracked
manually from each of the restaurants. Today, with
volumes increasing, it is tracked through the product-
mix. Outlets are able to gauge their best-sellers. The
distribution business works on stock turnarounds as
fixed costs such as storage are distributed over larger
volumes. Therefore, RKFL has three turnarounds a
month compared to just one when it began
operations.
The planning behind McDonald's supply chain
is so intense that if a new product hits the market
today, its journey is sure to have begun a good two
years before that. The competition is way behind
for McDonald's in India. Its fellow American food
giant Kentucky Fried Chicken (KFC) entered the
Indian market around the same time, but is yet to
catch up with it. The truly Indian fast food chain,
Nirulas of Delhi is trying hard to make its presence
felt in Delhi's adjoining states but with a snail's pace.
The gusto to take on the international giants such as
McDonald's is missing among Indian fast food
pioneers. Only time will tell, if they would ever be
able to give competition to the likes of McDonald's.
current strategy of centralized distribution
centres, involving high transportation cost
(especially in view of the vast geography of the
country). Comment.
3. What was the logic in McDonald's setting up
two separ<;1te )Vs with two different partners in
the same country? Was there some point in
completely neglecting the southern and eastern
parts of the country during its initial years?
4. What are your recommendations to Indian fast
food chains such as Nirulas?
 Volvo Truck Corporation
Volvo Truck Corporation (VTC) is a vertically inte-
grated multinational organization, manufacturing the
full range of commercial vehicles from cars to trucks
and buses. VTC has an · engine plant at Skovde
(Sweden), which has three distinct production
environments: process, manufacturing, and
assembly. The process environment is in the foundry
area, which is a capital-intensive single-flow process
implementing a Just-in-Time (JIT) system.
Maintenance workers have to be highly mobile so
that they can quickly be at a system breakdown point
when a problem occurs. Teams are linked to distinct
process areas-melting, forming, cleaning, core
making, heat treatment, etc.-with each having
around 50 employees with one supervisor, split into
a number of what they call 'semi-autonomous work
teams'. The operator is not greatly responsible for
the quality, maintenance, productivity, and decision-
making, with total responsibility devoted to the
supervisors. The units have no team leaders, nor do
they meet in any form of quality circle, although
they do have some job rotation within, or rather
between, phases.
At Skovde, the manufacturing environment is
linked to automated production in a multi-machine
set-up. The finished shafts and casings are transferred · · production, the engines go into one of the 12 docks
from the foundry to either the D factory where they
are machined into crankshafts, transmission covers
'
and camshafts, or to the A factory where they are
machined into cylinder heads and cylinder blocks.
In both the plants, teams are organized around
specific production lines and shifts with a philosophy
of job rotation, payment is linked to the achievement
of competences, providing a more cost-effective
production environment. In a functionally flexible
environment and with the machines running them-
selves, operators are released to perform indirect
tasks associated with material supply, quality,
housekeeping, and task allocations within the teams.
Operators are responsible for some control and
programming functions, product quality, machine
set-ups and retooling-which reduces down time,
ordering of material as well as machine operations,
and also planning their own work. It is the team
which is looking to define and make its own
'continuous improvements' and it is the teams, rather
than the managers, which are responsible for solving
quality problems.
The truck engine assembly at Skovde has a dual
production strategy in place, with all common
operations being carried out on an automatic flow
line. At the end of the . automated element
in which the customized elements are added
 The flow line system is automated with
r,1anuaalllyloading
. . ,
and unloading at the start and end
r,1anu rocess an d wit· h units
· came · d f rom machine
of the P ine by' a roller system. Each unit
. .1s loaded
h
to macthe . .
carrier system, which contains a
nto . .
0 rn uterized sensor that records information every
co. pan operauon
· .1s came . d out. Th.1s ·1s Iinked to a
urne
computer which sends a message to the store, which
then sends out material by automatic carriers to the
relevant station. There is a loose, task-rotating
structure that is fluid enough to allow operators to
wander around the system helping each other.
VTC has its Umea plant situated in Notth_ern
Sweden, which cuts, presses, assembles, and paints
cab parts to be delivered to assembly plants in
Sweden, Belgium, and Scotland. Production is based
around a series of short flows-a combination of
flow line and dock technology, with each flow
consisting of four stations organized sequentially in
a square formation. There are two operators per
1. Why does VTC have different sets of resp-
onsibilities for operators in the process,
manufacturing, and assembly departments of
its Skovde plant?
2. In which department of the Skovde plant do
st ation wi th a floating ninth person who also acts as
th e tearn Ieader and an operator replacement as· and
when required. The position of the team leader is
. d and not rotated. He continues to operate
appomte
as a blue-collar worker and to spend some of his
time in helping reduce the number of supervisors
by being responsible for the introduction and use of
new short flows, deciding when to get rid of people
and who to get rid of, and juggling labour shortages.
In other words, he carries out some of the more
mundane traditional supervisory functions. The plant
manager observes that 'We cannot expect a guy to
be a craftsman when he is doing the same job 15 or
20 times a day. If you expand the work it will give
[the operator] value. I am not talking about doing
the usual work for two hours instead of 30 minutes ,
I am talking of adding more complicated work
outside the usual work by expanding frontiers'
(Thompson ·& Wallace 1996).
you find the approach to job design the best?
3. In your view, is it right to appoint a team leader
like it is done at VTC's Umea plant? Is the
concept of a floating ninth person suitable in
a facility?
 OLIVETTI
Olivetti is an Italian multinational company, which inventory space. Olivetti has developed an inventory
is renowned worldwide for its computers, monitors,
management system for these components called
printers, and other peripheral devices. In the
SigerC. SigerC is based upon forecasting the
Netherlands, its sales head office is located at Leiden,
requirement of components using double-
while the after-sales-service office is based ·at
exponential smoothing and generating orders using
Nieuwegein. The service office controls the Olivetti
the classical EOQ model. Over a period of time,
service activities of the whole country and plays an
SigerC has proved to be reliable enough.
important role in the management of the spare-parts
. Apart from components, the Nieuwegein facility
inventory required for the service operations.
stocks inventories of around 2,500 different types of
The Nieuwegein f~cility stores inventories of
repairable modules, out of which around 1,500 are
repairable service parts (called modules) and .
frequently demanded. SigerC is not used for the
irreparable components separately. There are
inventory of these repairable modules. The inventory
inventories of about 11,000 different components,
of modules utilizes the remaining 75 per cent of th e
out of which almost 50 per cent of the components ·
·inventory space and is worth· about 100 time· s the
have a positive inventory status at any given time.
inventory of the components, thus warranting· good
The components occupy about 25 per cent of the
inventory control of modules.
 Inventory Management 375

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facilities/
suppliers

- Nieuwegein facility - Parts flow ----- Information flow

Olivetti has two repair facilities for modules-

one is loc t d. h under any circumstance. The service has to be
a e in t e Netherlands and the other at provided within two, four, or eight hours after receipt
Paris Fran U 11 . .
b ' ce. sua y, a repair 1s performed locally, of a phone call as mentioned in the service contract.
ut more c I .
. omp ex r~pa1rs or large batches of Therefore, a small portion of the modules inventory
repa1rabl d
e mo ulesare sent to the Paris facility. The
n0n-Olivetr lies for a maximum of one day with the service
I
Aro d parts are sent to extern a I repair fac i Iities. engineers to meet such short response-time service
Un 90
requ· per cent of the repairable modules are contracts.
Ired b
st Suppose a number of modules are given to a
With Oliv: ~u om~rs who have a service contract
1
spare- ~ - The figure shows the logistics of the service engineer on Monday evening according to
Parts Inventory
When · the nature of complaints received from customers.
form of a a cu stomer complaint is received in the The engineer services the customer complaint on
rough dia ~ho_ne call at the Nieuwegein facility, a Tuesday by replacing the modules, if required, with
engine osis of the problem is done and a service new ones. The remaining modules will stay with him
er is a . .
mention . ssigned. The service response time until Wednesday evening and, if not required for
ed in the service contract has to be fulfilled the day after, will be returned to Nieuwegein along
376 Production and Operations Management

with the defective modules on Thursday morning.
Thus it takes around three days in all to re-book the
correct modules in inventory at Nieuwegein.
The defective modules are either repaired locally
or sent to Paris. A safety stock of four days is kept at
Nieuwegein, keeping in view the re-booking time
of correct modules by service engineers, and the
possible delays by the repair facility at Paris. When
an inventory of repaired modules exists at the repair
facility in Paris, it exchanges the defective modules
with good ones on the same day (exchange option).
Otherwise, the facility repairs these modules and
returns them to Nieuwegein in about ten days (pure
repair option).
Olivetti maintains a database of the flow
logistics using its software called Olivetti Boa:
Repair Decentr~I (OLBORD). According to the
nature of complaint made by a customer, a specialist
uses his past experience and the back-order list to
decide which defective module should be sent to
which repair facility, as the real defect is not known.
An estimate of the repair time can then be made. A
fraction of the defective modules is considered to
be scrap and, hence, from time to time, new modules
have to be procured (Ashayeri et al. 1996).

1. Olivetti faces problems in deciding how many

3. Suggest an inventory control system to Olivetti
modules shoul9 be sent to the repair facilities
for managing the inventory of repairable
and when. What measures should the
modules.
management of Olivetti take in this regard?
2. Advise Olivetti about how many new modules
should be purchased by its Nieuwegein
service facility and whe,n.