Operations Management Principles Ip 5

This was a B paper

Planning Pg. 2

The recommendations are spread over three distinct aspects of the division's operations and are discussed separately for each aspect. The first concern is the supply chain. Presently, purchasing is a corporate office function. Since the Director of purchasing is not accountable to the division, he is reducing his ordering cost by ordering inputs in lots much larger than the optimum size. As a result the division's inventory carrying cost and the net cost to the company are greater than they should be. This situation can be averted by, bringing the purchasing function under the preview of the division and the "Purchaser" answerable to the divisional Vice President. Another aspect of the supply chain that needs correction is the distribution of finished goods. Presently, deliveries are routed through the NAW at St. Louis. There are two problems with this. The first is that it adds to the cost because of double handling and the second is that NAW manager reports to the automotive division vice president and therefore pays less attention to this division. Ideally, the finished goods should be shipped directly from the plant to the customer. This will have lowest cost and time. However, because the plant is in Mexico the shipment involves custom clearance, which introduces uncontrollable delays. Since the cost of delayed deliveries is prohibitive in terms of penalties and loss of reputation, direct shipment across the national border involves a risk that cannot be taken. Hence, a warehouse should be created in Texas near the Mexico plant, from which custom cleared goods, will be shipped to the customers. This warehouse should be entirely under the division's control. Another step that needs to be taken is the installation of a MRP/ERP system. Though this will involve an initial fixed cost, the

system will pay back with decrease in inventory carrying costs and reduced downtime

Planning Pg. 3

due to better scheduling today, the plant handles over ten thousand inputs and semi-processes items, the inventory of which is kept on an ad-hoc historical basis. An MRP system will enable the generation of precise material requirement. This will enable the cutting down of excess inventory, while ensuring that there are no stock outs. Production scheduling and linking the production activity with finance and logistics will be an added advantage. Ideally, the MRP should link up with the stocks with customers so that orders from customers are generated online without going through a time consuming manual process. These orders would automatically feed the production planning process. Similarly, the division's orders for inputs should be generated automatically by the MRP system. This would cut down the order processing and generating cost.

The next set of recommendations cover the manufacturing operations. A large portion of the division's operations was moved from Cape Girardeau to Mexico to take advantage of lower costs. Now there is a suggestion to move the operations to Asia to take advantage of the even lower costs there. Such a move would be ill advised. The market of the division's products is in America and shifting manufacturing to Asia would increase distribution costs and times. Besides managing the culture difference would be a problem that is not commensurate with the present level of operations. This move can be reconsidered if and when the company decides to significantly expand its capacity and enter the global market. However the shifting of the remainder of the production operations from Cape Girardeau to Mexico merits consideration. The plant at Mexico needs to be restructured and renovated as will be discussed later. This creates an

Planning Pg. 4

opportunity to create one state of the art plant, thus reducing fixed overheads that are now being incurred at two operating centers. Working at one production center would also be better for administrative control. The only disadvantage is that the division would be "putting all its eggs in one basket". Should anything go wrong at the Mexico plant, like a disaster or labor problem, there would be no back up. Hence lower costs have to be matched against diversified risk. A single production center can also be created by shifting the Mexico operations back to Cape Girardeau. Though the cost differential has decreased, Mexico is still cheaper and hence this suggestion is unmerited.

The best way to restructure and renovate the resources at the Mexico plant would be to incorporate JIT practices. The focus should be on lower batch sizes in order to incorporate greater flexibility in meeting the variation in ordered quantities. A prerequisite for this is to reduce set up times. For this the