You are on page 1of 11

SEIT Assignment

1
Lakshwiz Factory Module
Radharaman Jha 65
Rishabbh Sahu 69
Salil Parashar 74
Yash Deep Pandey 103
Mohit Mahant 104
Group 2
Case Summary
2
Gaps
Analyzed
Inventory shortage problem and excess inventory in some items
Material shortage -> Delayed production and delivery of the
finished product -> Huge loss to the company
High transportation cost and also the cost of holding the inventory
Most of the suppliers more than 200 kms away from the plant
Company
Autoflex industries, established in 1961, Leader in Auto Electricals
in India with expertise in design and manufacturing.
4 out of 5 vehicles rolled out daily in India are fitted with Autoflex
products.
All the products are manufactured at Autoflex, Coimbatore plant( 3
separate plants for different products).
Overall, Autoflex Industries, Coimbatore has about 900
components to be procured, which get assembled into different
products depending on the specification.
Major customers are: Almost all auto manufacturing companies in
India and few companies abroad.
3
The rental cost of the warehouses include the setting up of the warehouse, no
separate capital investment is required in any of the 4 locations.
We have assumed that the company uses a standard software based MRP system
which shows real time inventory level data. If not, it can be bought but we have not
included the cost for buying and switching to this system. Though we have kept a
safety stock to compensate for demand fluctuations, the calculations have been made
assuming constant rate of utilization of components
Though the case clearly mentions the fluctuations in demand, but no break-up or
forecast on monthly basis has been provided
The demand mentioned in the question is the actual demand and not a forecast
The transportation cost is 50% of the ordering cost
Since the ordering cost in Pondicherry is Rs1500, it is likely that a major
component of the ordering cost in other cities would be transportation cost.
Thus the ordering cost for the new model has been considered 70% of the current
ordering cost (30% reduction in ordering cost due to reduction in transportation
cost which is almost 50% of ordering cost).
The size of the components has not been considered
Assumptions
4
Each warehouse has enough space to keep all the inventory at the same time
Since we do not have sufficient information regarding the above two points in the
case
The prices and the ordering costs remain the same throughout the year
The demand given would be applicable from the day this strategy would be used
The benefits calculated are from 115 components mentioned in Appendix VII of the
case provided
Since the details of the rest of the components has not been provided.
The MRP system used is software based and is capable of showing inventory data
almost in real-time
Autoflex is a leader in Auto electrical in India, and as mentioned in the case most of
the MRP systems these days are software based.
The item: V Milling Rear has been excluded from the calculations, since the demand
given in exhibit VII for this item is 0
Although the company procures around 900 items, only the ones in exhibit VII have
been used to calculate the cost benefit using this model.



Assumptions Continued..
5
Old Model (As-
is)
Centralized warehouse:
One warehouse at
Comibatore



2-Bin System

Ordering System: Lot for
Lot


Product Manager
purchasing components
for each model.
Proposed New Model
New Model(To-be)
Decentralized warehouse
: Four warehouses, one
in each Bangalore,
Chennai, Pondicherry
and Coimbatore

Safety Stock

Ordering System :
Economic Order Quantity

Sourcing manager who
keeps a record of the Bill
of materials (BOMs)
made by a product
managers





Advantages of
New Model
Since most of the
suppliers are located
nearby these 4 cities, we
can significantly cut on
transportation costs (using
full truck loads) and
inventory costs
Safety stock would help in
optimal space utilization
and reduction in costs
compared to 2 Bin
system.
Ordering using EOQ
reduces the inventory and
transportation costs
significantly
The BOMs can be
combined for full truck
load or FTL




The Material Requirement Planning (MRP) System
We should also use the Continuous review policy, this would help us reduce the
ordering cost and also save on extra inventory holding costs. Using this system well
order only those components which are on the limit and need to be re-ordered as per
the re-order point formula.
Instead of product managers ordering for themselves we will have a sourcing
manager who can order on behalf of them, each product manager should raise a bill
of material (BOM) that he/she needs. This BOM should reach the sourcing manager,
who would give a collective order to the warehouses.
The sourcing manager at the warehouses should keep a check on the inventory
levels, should order as the inventory reaches the re-order point.
MRP System and EOQ Model
The EOQ Model
Ordering costs vary inversely with carrying costs. It means that the more orders a
business places with its suppliers, the higher will be the ordering costs. However, more
orders mean smaller average inventory levels and hence lower carrying costs.
It is important for a business to minimize the sum of these costs which it does by
applying the economic order quantity model.
6
7
Annual Demand (d)
Ordering Cost (c)
Price of component
(h)
No. Of Orders(Lot
for lot) (n)
Quantity to be
ordered as per new
model(EOQ) (q)
Cost of procuring
as per new model
(y)
Handling cost (new
model) (x)
Variables
Set of Variables and Formula used
Formulas used:
Quantity ordered (Lot for lot) (Q) = d/n
Annual Cost for double bin (Lot for lot)
(For a component) = (c + h/5*Q/d*2)*d/Q
Quantity ordered (new model) (EOQ) (q)=
(2*0.70*c*d/((h/5) + x))^0.5
Total cost of component (new model) =
(0.70*c + h/5*q/2*q/d + q/2*x*q/d)*d/q
Safety Stock = Z * STD * L^0.5
Where: Z is a factor, referred to as Safety
Factor (associated with service level), STD :
Standard deviation in demand per unit time,L :
Lead time for getting the component


Variables
Reordering point
The inventory level at which an order should be placed; it considers two
factors:

Safety Stock
The safety stock is the amount of inventory that needs to be kept at
the warehouse in Coimbatore to protect against deviations from
average demand.

Average inventory during lead time = L * AVG
L : Lead time for getting the component
AVG: Average demand per unit time

Thus,
Reorder point = Average inventory during lead time + Safety
Stock
= Z * STD * L^0.5 + L * AVG

Reorder Level
8
The following table and graph shows the cost analysis done for the component:
Condenser (All Products)

Example
Microsoft Office
Excel Worksheet
9
Cost Benefits

The annual cost benefits by using this model as per the sheet = Rs 2,44,52,381.2
The annual rental costs of ware-houses = (5,000+10,000+15,000+20,000)*12 = Rs
6,00,000

Cost Benefit Warehouse rents= Rs 2,38,52,381.2

Safety stock
The cost incurred in safety stock has not been subtracted from the net benefit
since the lead times and the demand fluctuations would vary for each component.
If we consider the safety stock to be around 30% of average inventory of a
component, the total sum for storing safety stock of all components in exhibit VII =
Rs 41,05,355

Thus Approx Net Cost benefit = Rs 2,38,52,381.2 - Rs 41,05,355
= Rs 1,97,45,025

The net cost benefit is only from the components mentioned in exhibit VII, the cost
benefits would increase further if the model is used for all the 900 components
procured by Autoflex Industries.
Cost Savings
10
11
Thank You