Unit:  Operations Management Tools & Methods

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As the production manager, you need to minimize both ordering and inventory costs. You need to provide a recommendation of the optimal order quantity of raw materials to your plant manager. Your objective is to determine the economic order quantity (EOQ). If the annual demand for Ultamyacin at Smitheford is 400,000 units, then the annual carrying cost rate is 15% of the cost of the unit. The product costs $48/unit to purchase, and the product ordering cost is $28.00.

In your report, discuss information based on the following questions:

  • What is the basic EOQ?
  • What is the TC (total cost) at the EOQ?
  • How much would the TC increase if the order quantity must be 1,000 units?
  • How is JIT (just-in-time) ordering methodology different from EOQ methodology?

Show all your calculations.

Scenario:

Smitheford Pharmaceuticals

Smitheford Pharmaceuticals was founded by a former officer in the Civil War, General Robert Smitheford, in 1878. He moved his family to Colorado Springs to aid in his wife’s tuberculosis condition. At the time, it was believed that the sunshine and high altitude had curative effects.

The company quickly grew and expanded. To improve the economies of several growing towns in Colorado, General Smitheford built additional manufacturing facilities in Pueblo, Grand Junction, Fort Collins, and Durango, Colorado.

Smitheford was an excellent leader, as demonstrated by his rapid rise in the Union Army. He used management incentives and was an early follower of Frederick Taylor on methods improvement and employee satisfaction. The company has since adopted total quality management (TQM) philosophies but has done a poor job of implementing these principles in manufacturing.

By the 1950s, Smitheford Pharmaceuticals grew to become the 6th-largest pharmaceutical firm in the United States. Expansion in manufacturing occurred in the 1970s and 1980s with operations in Canada, Puerto Rico, France, Japan, Mexico, and Brazil.

Many challenges are facing the industry today. NAFTA impacted some advantages that Canadian manufacturing might have had. Stricter FDA guidelines have made transportation of partially manufactured products more complicated; drug interactions, especially for the elderly, can seriously affect whether or not to release a new product, and manufacturing equipment has become more sophisticated, and with the advanced technology comes increase fixed costs.

You are a midlevel manager of production operations at Smitheford. You will need to look at several methods to improve efficiency and effectiveness for its area of responsibility. You will use quantitative and qualitative methods to make recommendations for the improvements.

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