Filatoi Riuniti Case Study

29 June 2018

To:         Giorgio Armeni, CEO Filatoi Riuniti

From:    Milan Consulting Group Inc.

Subj:      Optimizing Operations at Filatoi Riuniti

 Encl:            (1)    Optimization Model and March Recommendation

                      (2)    Variability Analysis

        (3)    Increased Demand Model

        (4)    Final Recommendation Model

EXECUTIVE SUMMARY

Filatoi Riuniti has the ability to produce enough raw cotton to meet current demand but lacks sufficient capacity to spin enough of the four different sizes of yarn and must, therefore, outsource spinning production to six local mills. If Filatoi Riuniti continues to spin as much finer yarn as possible in-house and outsource only coarser yarns, total costs in March will be over $1.42M. After reviewing the cost of production and transportation against production capacity across Filatoi Riuniti and the six mills, we have found the optimal quantity of yarn Filatoi Riuniti should produce and outsource to minimize the overall total monthly cost to $1.38M. The specific quantities for this new optimal plan, referred to hereinafter as base case, can be found in Figure 1. This base case will save Filatoi Riuniti approximately $40k each month, accumulating to almost $500k per year.

Filatoi Riuniti can improve this base case, increase market share, and lower total cost by approximately $20k annually by executing two available options:

1. Renting another spinning machine for medium size yarn.
2. Sell 6,000 Kg/month of medium size yarn to the new client at ≥$12.45/Kg.

While this is currently the optimal solution, there is always potential variability in supply, demand, and cost. We have analyzed for a few of these possible changes below and have additional recommendations based on our findings. Changes not discussed below can be uploaded into our current model of Filatoi Riuniti’s operations to find future optimal solutions. Our model parameters can be found in Figure 2.

CHANGE IN PRODUCTION

After studying the constraints set on the system by the limited spinning capacity available at Filatoi Riuniti, the natural first proposal is to add a rental upgrade to increase that capacity. This rental upgrade would come at a cost of $1,500/month; however, the rental will increase spinning production capacity by 600 hours/month.

This solution would increase Filatoi Riuniti’s medium yarn production up by 1,412Kg/month, or 7.5%, from the base case solution which would replace the same amount purchased from the De Blasi mill. However, the costs saved from purchasing would be offset by the $1,500 monthly rental cost. The total monthly cost, as shown in Figure 3, would increase by $229.41 from $1.38M, which is a minimal amount accounting for a 0.016% increase.

Learning from the first proposal, where the optimal solution, according to the model, only altered the production of medium yarn at Filatoi Riuniti, we considered a second case where the factory rents a medium yarn-specific spinning machine. This machine would come at a monthly rental cost of $3,000 and production capacity of 300hours/month. However, since it is medium yarn-specific, its cost of running is only at $5.70/Kg as opposed to $11.40/Kg in the base case.

This solution would introduce additional production of medium yarn at Filatoi Riuniti of 706Kg/month for the new rental machine which would replace the same amount purchased from the De Blasi mill. Furthermore, because of the relatively low cost of operation of this rental machine, this solution, as shown in Figure 4 saves $1,658.82 in total monthly costs which amounts to a 0.12% saving: small but not insignificant.

CHANGE IN COST

After working with Filatoi Riuniti’s plant manager and accounting department, we have discovered a historical variability of 5% in Filatoi Riuniti’s internal production cost. While small, this 5% change could cause a change in our recommended production allocation. Figure 5 shows our analysis and the variations that could alter our initial recommendation.

CHANGE IN SUPPLY

Recently one of the local mills, De Blasi, alerted us that their production capacity may fluctuate by 20% next year.  After analyzing the extreme cases, we found that a ±20% change in De Blasi production would not affect our total cost. Our analysis is shown in Figure 6.

Giuliani Case

CHANGE IN DEMAND

During our analysis, we learned about a new client that is interested in purchasing 6,000 kg of medium yarn per month.  Based on our analysis, we would break even if we charged a minimum of $12.45 per kg for this additional demand; however, we could also incentivize this deal by offering an adjustable price for the first 5,388 kg at $12.3 kg and then charging $13.76 per kg for the next 2,268 kg. Our analysis is shown in Figure 7. Additional information such as contract length would have to be obtained from the new client to decide on the best price to charge.

FINAL RECOMMENDATIONS

After presenting our findings to the six local mills, we discovered that Ambrosi is unable to produce fine yarn and Giuliani can implement an overtime shift. Since the former changes our optimal base case solution, we recommend the following:

1. Share up to $28,411.76 of Ambrosi's set-up costs for production of fine yarn.
2. Encourage Giuliani to run an overtime shift to lower total monthly cost.

The analysis for the all recommendations, which will save Filatoi Riuniti over $39k annually, is presented in this memorandum and found in Figure 8. By combining these final recommendations to our initial recommendations and base case, Filatoi Riuniti will save over $500k per year, increase market share, and strengthen mill relations.

BASE CASE PRODUCTION RECOMMENDATION

[pic 1]

             Figure 1

LINEAR OPTIMIZATION MODEL

[pic 2]

Figure 2

RENTING MACHINE UPGRADE

Figure 3

RENTING MEDIUM YARN MACHINE

Figure 4