The Omega Appliance Company’s in-house production capacity has been expanded, and as a result, excess capacity is now available in the Production Department. The company is now studying the possibility of making the compressors in their own plant, rather than purchasing from external suppliers. The available capacity allows for production of compressors at the rate of 800 units per month, and the production costs are expected to be OMR 22.5 per unit. The setup for a production run requires four hours, with a cost for labor and lost production time of OMR 75 per shift hour.
13. What is the optimal order quantity if the company manufactures the compressors in its own facility?
14. What will the maximum inventory be?
15. How many production runs will be done every year?
16. What is the duration of each production run?
17. What is the total annual cost of this “Make” policy?
18. Should the Company “Make” or “Buy” the compressors? Justify your recommendation.
Part B-Uncertain Demand
Assume that the Omega Appliance Company had decided against in-house production of compressors. After one year of operations, the company finally reached agreement with suppliers to ensure a constant lead time of 5 days. However, the company also realized that daily demand for the compressors exhibited some variability, with the mean annual demand still at 7700 units, but with a standard deviation of 120 compressors.
19. The company has decided on a service level of 99%. Accordingly, what size of safety stock should be kept to cope with the uncertainty of demand?
20. Determine the total annual inventory cost under this 99% service level inventory policy.
21. In a first assessment of the new policy, the company managers concluded that the type I service level is not enough information encompassing. What is meant by this?
22. Calculate the fill rate for a reorder level of 135 compressors?
23. What is the expected number of units short per cycle?
24. The Omega Electronics Company is planning to switch to a periodic review system where the stock-on-hand is reviewed at 12 noon every Friday. Analyze the prospective inventory system and help the company decide whether or not to shift to a periodic review system.
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