MMM267: With the Outbreak of COVID-19, the World is Experiencing a Severe Shortage: Business Logistics Assignment, DU, Australia

Part 1

With the outbreak of COVID-19, the world is experiencing a severe shortage of ventilators for treating patients in hospitals. DBS is a manufacturer of ventilators in Melbourne. It uses a special component to make its top-of-the-range ventilators. DBS requires an average of 24,000 units of this special component every year in its manufacturing process. The major supplier of the special component that DBS has been dealing with, is a preferred supply chain partner who charges a price per unit of $3000 for the component. Each order costs $500 to process. Because of limited storage space, the operations manager wants to factor in inventory holding costs at 13.75% of the unit cost. You have been asked to:

• Determine the economic order quantity (EOQ) and total annual cost if ordering the EOQ number of units. How much will DBS be able to save by adopting the EOQ versus a current Q = 400? What is the reorder point with safety stock if the lead time is 21 days, the standard deviation of weekly demand is 3.75 and on average DBS operates for a total of 48 weeks every year? Assume a z value of 1.645 correspondings to the desired service level as specified in DBS’ operating procedures. What would the reorder point be without safety stock and how would you interpret each of the two reorder points?                                       

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• Environmental considerations, material losses, and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 7.5% of the components that DBS purchases are damaged in transit thus becoming unusable and have to be disposed of. The disposal cost is $250 per unit. Find the new EOQ and total annual cost when the disposal cost is considered. What implications does this have for the sustainability of DBS’ inventory practices?
• Explain the implications to the operations manager if estimates of setup (order) costs include fixed, semi-variable, and pure variable costs while inventory-holding costs include only pure variable costs.

Part 2

In the above data table, the operations manager of DBS Manufacturing Company has provided you historical data on their annual requirement of the special component over the past twenty years.

• What is the forecast requirement for next year using a three-period, four-period, five-period, six-period, and seven-period simple moving averages? Compute the MSE for each of those moving averages and compare your results.
• Using the same data table, find the best single exponential smoothing model by evaluating the MSE; starting with an alpha of 0.025, and changing alpha in increments of 0.025. How does the best single exponential smoothing model compare with the best moving average model you found in (4)?
• If the DBS operations manager asked for your advice as to whether it is better to use time-series forecasting models or regression-based forecasting models, what would your advice be and why?

Part 3

DBS is also expecting the demand for its top-of-the-range ventilators to increase further from the next year. Given the increase in the annual requirement, the production manager is contemplating to start manufacturing the special components in-house to save costs rather than sourcing them from outside.

• Given the current purchase price of $3000 per unit, what will the average annual requirement need to be to justify making the components in-house if the variable cost of making is $1200 per unit and an upfront fixed cost of $20,000,000 is needed to procure the necessary plant and equipment? However, if the expected increase in demand does not materialize and the demand is forecast to be only 10,000 units next year, then what will the maximum variable cost of making the need to be for DBS to still consider making the components in-house; given an upfront fixed cost of $20,000,000 would still be needed and the supplier still charges $3000 per unit?
• Going forward, if it is found to be a better decision to make the components in-house, DBS will then need to select an optimal location point to set up its manufacturing facility. Given the following location information and expected material movements from several transportation depots to the DBS’ intended manufacturing facility, find and plot the best location using the center-of-gravity method:

• Explain to the DBS operations manager some of the potential consequences of not understanding or considering non-quantifiable factors like local culture and practices when making location decisions.

Part 4

There are three distinct types of ventilators; namely, TX (manual model), TY (automated model), and TZ (digital model), which DBS Manufacturing Company makes and sells to its customers. The operations manager has decided to combine orders for the same product type from customers to increase work order size and therefore be able to make one large production run per product type. Specialty equipment is used to make these products, and it is time-consuming to clean the equipment and set them up again between production runs. Each equipment and operator runs a daily eight-hour shift with 45 minutes lunch break and 20 minutes for operator breaks.

• What is the total workload (demand) in hours for the above work order mix?
• How many pieces of equipment will it take to get this work done in 1, 2, 3, or 4 days? What might you say if DBS asked for your expert advice on how might this process be further improved?
• Explain to the DBS operations manager the pros and cons of various capacity expansion strategies.

Part 5

• The DBS operations manager has determined that their flagship product experienced 2 turns last year, with an annual sales volume (at cost) of $18,200,000. What was the average inventory value for this product last year? What would be the average inventory level if inventory turns could be doubled?
• You have been asked to evaluate DBS’s cash-to-cash conversion cycle under the following assumptions: sales of $25 million, cost of goods sold of $18.2 million, 48 operating weeks a year, total average on-hand inventory of $9,100,000, accounts receivable equal to $11,455,000 and accounts payable of $12,695,000. What do you conclude? What can you recommend to improve performance?
• Explain to the DBS operations manager implications of a negative cash-to-cash conversion cycle.

Part 6

• The operations manager of DBS thinks they can source some of their basic raw materials from overseas low-cost economies, which could lead to significant savings by reducing their purchasing costs. However, there is a risk that the quality of raw materials procured from those overseas, low-cost economies may not be as high as that provided by the current suppliers. If the quality of raw materials is not top-notch, this can hurt the quality of the finished product that DBS sells to its customers. Most customers of DBS are returning customers with long-standing loyalty and they keep coming back as they trust the quality they get although DBS charges a higher price relative to its closest competitors. Using the interlinking model of quality and profitability, explain to the operations manager how ensuring a high product quality can actually help DBS enhance profitability.
• How can you convince the DBS operations manager that quality management concepts can help towards boosting sustainability efforts? Find some relevant examples to support your arguments.