1 Executive MSc Logistics and Supply Chain Management Module 4: Finance, Manufacturing and Inventory Manufacturing and Inventory Assessment Submission Date: 7th November 20162 First for Forensic (FfF) Case Study First for Forensics (FfF) is a high tech company that manufactures and markets a range of products in the field of forensic science. Their main revenues have traditionally been generated from their core business; namely blood, drug and DNA testing equipment. Their markets are to the forensics services, law enforcement agencies and sports drug testing authorities around the world. However, a growing part of the business is in the sale of consumables, including reagents, calibration solutions and special cleaning fluids needed to operate the equipment along with a wider range of associated consumables including protective rubber gloves, protective eye glasses and finger print kits. These are supplied as branded own label products. Manufacturing capability The company manufactures two products for forensic science market namely F1-Basic and F1- Advanced. Both products are designed and manufactured in a factory at Cranfield Science Park near Cranfield University. The company has had unparalleled success with these two products for the last 10 years being the first to bring the technology to market in a portable format. However, the patent has now expired and recently competitors have started to flood the market with lower cost versions. Although customers have been loyal, the average high value of the British Pound has meant international sales are under pressure as margins are squeezed. Moreover, the company's delivery performance has been poor and the company continuously fails to meet customer delivery dates. This is in spite of the fact that, on average, the company's inventory turns for finished product are around 3.5. Manufacturing shop floor operations The basic product design for both products has a high level of commonality and they share a high percentage of the same components in their Bill of Materials (BOMs). However, there is a wide range of customer-specified optional extras which increases the product complexity. These optional extras relate to the number of substances that can be detected by each machine. F1-Advanced machines have an additional functionality in terms of the range of analysis that can be performed. The customer specifies the optional extras at the time of placing an order. The optional functionality is achieved by inserting additional printed circuit boards (PCBs) which are fitted onto the main electronic motherboard (each optional extra selected by a customer requires an additional PCB to be fitted). There are currently a range of 5 test options that can be selected by customers for the F1-Basic. However, the F1-Advanced has a further 12 test options (17 in total) that can be added to reach its full functionality.3 The production facility (shop floor) at FfF has three main areas: 1. The first of these is the batch manufacturing area which fabricates the subassemblies required in final assembly. These are produced in batch quantities, based on Economic Batch Quantity (EBQ) calculations. The layout in this area is arranged following the 'process layout' where each batch order follows a specific routing around this area until completed. Once the parts and subassemblies are produced they are taken to the warehouse where they are stored until needed by final assembly. 2. The second area is the electronic fabrication centre which produces the main electronic mother board and the optional PCBs. All the motherboards and optional PCBs are produced on one machine and because there are a wide range of PCBs, they are produced in long batch runs to offset a 2 to 4 hours change over time. Therefore, there is a high inventory (several months of cover) kept for the complete range of PCBs which are stored in the warehouse prior to final assembly. As the machine used to make the PCB's costs in the region of 4M Euros each, it is not financially viable to invest in further machines at this point. 3. The third and final stage is final assembly where the subassemblies and electronics are assembled into finished products. The final assembly operations consist of two assembly lines, one dedicated to F1-Basic and the other to F1-Advanced. Each assembly line comprises 6 workstations. Once the product has been assembled it is packaged together with its language-specific technical manual and appropriate country mains power cable. Although the workstations are in close proximity, there appears to be a high level of work-in progress (WIP) inventory between some of the stations. Manufacturing planning and control systems Manufacturing planning is based on a Master Production Schedule that is agreed by Sales and Operations on a monthly basis. The forecast for the total number of sales of machines is reasonably accurate. However, the forecast accuracy for individual order specifications is very poor. In addition, the sales team are on a financial incentive to meet the quarterly sales target, so will offer price discounts to customers towards the end of the quarter if sales are slow. This tends to give a sharp increase in sales in the last week of every quarter and a slump at the beginning of the new quarter. As orders are received from Sales, a Planner assigns a due date and passes the specification to Manufacturing. As Manufacturing can't always meet the customer lead times, they are producing to the forecast. A recent study undertaken by Cranfield students showed that it took several weeks to get product through the plant but no one is quite sure why it takes so long. In addition, there is an inventory management system used for managing materials in the warehouse and supporting purchasing decisions for the replenishment of raw materials from vendors. However, there seems4 to be many discrepancies between the data in the system and real life. For example, inventory of materials in the warehouse never matches what's recorded in the system's inventory files. Lead times from suppliers range from 4-16 weeks depending from where they are sourced. Lead time variance is not uncommon. The Purchasing teams have been told not to be short of parts as this disrupts manufacturing, so they plan to maintain high levels of raw materials to cover all eventualities. To keep purchasing costs down, the Procurement department frequently tenders for parts and changes suppliers if they can buy at lower costs. There is an unacceptably high defect rate for finished products even though there is a thorough quality control and inspection system in place. To overcome the problem, the company has a dedicated area for reworking product. In this area three people are dedicated to finding the problems and repairing any faults so that product can be put back into stock as quickly as possible. As inventory levels of raw materials (RM), work-in progress (WIP) and finished goods inventory (FGI) have grown steadily over the past few years a new automated warehouse was built in 2010 to try and solve the inventory problems. The workforce is a mixture of semi-skilled and skilled workers. Many of the employees have been at the company for years and have good knowledge of the functions they perform. Sourcing and supply of consumables FfF owns a main warehouse which supplies all of its customers in the UK and Europe, ordering is telephone or internet based, usually direct from the end-user. For customers outside Europe alternative channels are used. The company currently supplies a range of 243 SKUs (ranging from basic reagents to special calibration solutions, gloves, glasses, etc.) from 14 vendors. One Buyer and one Inventory Manager are employed by the company to negotiate supply, review DC stock levels, and place orders with vendors as required. The automated warehouse is, according to the Financial Controller, 'overflowing with consumable inventory' while the Inventory Manager has a standard policy to hold 10 weeks of stock for all items. All consumables are managed in the same way irrespective of sales volumes or valueusage.5 Assignment requirements You have been engaged by a company to act as a consultant. Your high level task is to produce a consultant-style fact-finding report for FfF in two parts: Part 1: To analyse FfF's existing manufacturing operations and develop an integrated set of recommendations to enhance customer service levels, reduce overall lead times, whilst reducing operating costs. Part 2: To address the ineffectiveness of the company's inventory management policy by reducing current stock levels, maintaining service levels to customers and release cash which the company can utilise in manufacturing (required data for this part is available in FfF.xlsx file). The report's specific requirements are as follows: For Part One (manufacturing operations): 1.1 A schematic layout diagrams illustrating the current factory layout. This should show both the physical and information flows. [10 marks] 1.2 Discussion on the ineffectiveness of the existing shop floor operations and other issues in the manufacturing planning and control systems. [10 marks] 1.3 A recommended layout schematic diagrams to improve the physical and information flows in shop floor operations and manufacturing panning systems. [10 marks] 1.4 A commentary regarding the manufacturing planning and control strategy (MRP/JIT/Hybrid) that you would recommend the company to follow and your reasons for this. [10 marks] 1.5 Discussion on the linkages between the manufacturing planning and control strategy the company should adopt and the proposed shop floor operations. [10 marks] For Part Two (inventory management – using FfF.xlsx data file): 2.1 Quantify the value of the current inventory and the cost of holding this stock per year for the consumables, assuming an annual holding rate of 27% and that the 10 weeks of stock policy is correctly implemented. [10 marks] 2.2 Segment the consumable inventory based on the value-usage criterion. Present and discuss the results including a Pareto chart. Explain what other segmentation criteria might be used. [10 marks] 2.3 For consumable inventory, design a periodic review inventory policy (fixed interval-variable quantity policy) for each of the segments that you identified in 2.2. Define all the parameters that you are using. Explain how this policy should help FfF reduce stock investment whilst maintaining acceptable service levels and how this policy compares to a fixed quantity – variable interval policy. [10 marks]6 2.4 Using a spreadsheet, calculate the consumable inventory holding costs of your chosen segmented inventory policy. Present the results in a comparative analysis against the current base-case (i.e. against the results in 2.1). In your answer, describe how you obtained the results including the formulae that you used. Clearly show how much cash you might expect to release from inventory and how long it will take to reach the reduced overall stock levels. [10 marks] 2.5 Using a spreadsheet, do a sensitivity analysis of your recommended review periods. What is the impact on the inventory and the inventory value if you suggest twice as long a review period for A items? How much the inventory value will change? [10 marks] Further supporting information The only data available to you is an Excel file called: FfF.xlsx FfF are expecting demand for consumables to remain constant over the planning horizon (demand is stationary or level for all the products). Although new equipment is sold, some users migrate to alternative suppliers of consumables. For section 2.1, demand data will give you 52 weeks' worth of stock per SKU. Calculate stock value from the assumption that 10 weeks' worth per SKU is held on average. In fact, some items will have more than 10 weeks' worth; some will have less. For section 2.2, we discussed Pareto Analysis of value-usage in class. I leave it to you to choose useful segments. Remember that Class A items will be those meriting most attention and producing largest savings if carefully managed. It is common to select three classes, but if there is good reason, then the concept works with 4 or more classes. As for other segmentation criteria, think how you could simplify the procurement process. For section 2.3, remember that the way to calculate the review period is to calculate the EOQ, and convert this into weeks of usage. The "Cost per Order" for the EOQ formula is not defined; the relative frequency of ordering high value-usage items to low value-usage is the important aspect. I suggest that you might use £40/order as a starting value and adjust if you think that this generates too many or too few replenishments (sensitivity analysis). To design a periodic review policy, you should specify how you would forecast, set safety stock, control the inventory. Class A by definition merits more time and attention; class B less so, etc. For section 2.4, you have a formula to calculate the average stock for each item in a Periodic Review system. Hence you can calculate total average stock. This can be compared to the stock in the base case. Reduced stock gives once-off cash saving, and then a reduction in capital employed.7 For section 2.5, you are expected to do a sensitivity analysis on the recommended review period. What happens if you review more frequently than imposed by the EOQ/D? What happens if you review less frequently? For all parts you are expected to be as clear as possible as we will reproduce your results. Report general requirements a) The total word count is STRICTLY limited to 2500 words (including the executive summary, and excluding the references): 1500 for the analyses of the manufacturing operations; and 1000 for the inventory policy. b) The report should begin with a short Executive Summary - one paragraph of maximum 300 words. This is included in the word count. c) As the audience would be a business, the report must be very concisely written. Do not repeat the issues raised in the case (i.e. pages 2-4 in this document) as this will waste word count (and you could be caught for plagiarising). d) Where appropriate please include carefully labelled figures and tables when presenting results. Ensure each figure and table is numbered, has a meaningful heading and that all axes are clearly labelled. Marking criteria The description of the manufacturing operations has been kept deliberately brief to allow flexibility in your responses. There are a number of strategic approaches the company could adopt and therefore it is expected that no two reports will be the same. A balanced and reasoned approach is required. Marks will be awarded for the level of understanding demonstrated in the concepts and discussion you raise. In addition, marks can also be gained for introducing innovative solutions - so long as they can be supported. This is a practical assignment. The 'acid test' is whether your report could be successfully implemented, the concepts that you employ and the supporting discussion that you provide. There is no one "correct" solution, but we hope you can suggest how First for Forensic can make significant savings whilst satisfying its customers.