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Blanchard Importing and Distributing Co. Inc. (HBS Case 9 - 673 - 033)
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Size changeover cost = (cost of resetting all machinery for change in bottle size/ avg. no.
of different items of given size processed between size
changeover)
= 23000 / (52X7X10)
= $6.3186 per changeover
Label changeover cost = Labour cost incurred while label changeover process
= (23000X0.5X8*)/(52X7) + 5X2.5X0.5
= $10.2 per labour changeover
*Assumption each working day is of 8 hrs.
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= $ 0.9396
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Advantage-
1) The system achieves the balance between two costs ordering cost and the carrying
cost.
2) The system keeps track of removals from inventory on a continuous basis, so the
system can provide information on the current level of inventory for each item
3) The system helps meet the anticipated customer demand.
4) The system keeps buffers between successive operations to maintain continuity of
production (reducing the variability in demand at various stages).
Disadvantage-
1) EOQ/ROP system is essentially a reactive approach; this approach gives only an
order quantity, it does not suggest ways to reduce the inventory.
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2) For implementation of EOQ a perpetual inventory counting system needs to be in
place, this implies substantial investments which might not be feasible for some.
3) Even if EOQ system is in place there is necessity to physically count the
inventory periodically in order to ascertain the accuracy of the system.
4) EOQ/ ROP is a static system that is, it does not change automatically with the
change in demand. For every period a new EOQ/ ROP needs to be established.
5) It is valid for a single product and not a basket of products. (Assumption made
while deriving the EOQ/ ROP.)
6) It does not take into account the other production factors such as times required
for production run (as in this case, all one size items are produced in one go rather
than changing the sizes and hence a sufficient quantity of other sizes need to be at
hand in order to reduce the stock out situations.)
Advantages-
1) At Blanchard finished case inventory storage area is not a constraint (as actual
finished goods inventory had never occupied more than 50% of the reserved
space) hence carrying cost is fixed (i.e. security, heating, cooling etc.) regardless
of the volume of the finished goods inventory. Hence Blanchard importing &
distributing co. can focus on reduction of other costs.
2) The substantial cost incurred at Blanchard is that of setting up cost in which the
size changeover takes one complete day. Hence it is necessary to reduce this time
by reducing the size changeover. Bob and Hank are exactly doing the same.
3) Bob and Hank are not following the EOQ/ ROP set as per 1969 as it is now
obsolete, the basis on which these values were based was with the certain pattern
of demand for items as per 1969 data. Also it did not account for the pattern of
production (i.e. all items of same size in one batch). Usage of latest data for
predicting demand and accounting for the pattern of production ensures that the
setting up costs are low and service level is high.
Disadvantages-
1) Due to the patter of production of batch wise production based on size as well as
to maintain high level of service a higher level of finished goods inventory is
being produced, this is tying down the capital in form of inventory.
2) Since substantial amount of funds are locked in the form of the inventory the
company¶s growth is hindered in terms of expanding business by means of wine
merchandising.
·
èe prefer the EOQ/ ROP system as gains from reducing the order/ production size
(gains in terms of less value of inventory being produced) which though lead to
increase in setup cost far outweigh the gains from Blanchard¶s current system (gains
in terms of reduction of setup cost) while, costs are that of the value of inventory
being produced.