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FabQual Ltd. Manufactures parts and subassemblies for a number of small-volume
Manufacturers of specialized construction equipment, including bulldozers, graders, and cement
Mixers. FabQual also manufactures and distributes spare parts. The company has made a
Specialty of providing spare parts for equipment no longer in production; this includes wear parts
That are no longer in production for any OEM.
The Materials Management Group (MMG) orders parts – both for delivery to a
Customer’s production line and for spares – from the Fabrication Department. Spares are stocked
In a Finished Goods Store. FabQual’s part number 650810/ss/R9/o is a wear part made only for
Spares demand. It has had demand averaging 300 units per week for more than a year, and this
Level of demand is expected to persist for at least 4 more years. The standard deviation of weekly
Demand is 50 units. (You can ignore this standard deviation information. You will not need
To work with it for the questions I have asked.)
The MMG has been ordering 1300 units monthly of part number 650810/ss/R9/o from
The Fabrication Department to meet the forecast annual demand of 15,600 units. The order is
Placed in the first week of each month. In order to provide Fabrication with scheduling
Flexibility, as well as to help with planning raw material requirements, a 3-week manufacturing
Lead time is allowed for parts.
In the Fabrication Department, 2 hours is now allowed for each setup for a run of part
Number 650810/ss/R9/o. This time includes strip-down of the previous setup; delivery of raw
Materials, drawings, tools and fixtures, etc; and buildup of the new setup. The 2-hour setup time
Is a recent improvement over the previous 4 hours, as the result of setup reduction activities in
The Fabrication Department. The Fabrication Department charges $20 per hour for setups. Part
Number 650810/ss/R9/o enters the Finished Goods Stores at a full manufacturing cost of $55.
The Financial Office requires a 25% per item per year cost for inventory planning and control.
(This is your annual holding cost rate).
Analysis:
1. Calculate the total annual cost of the present ordering policy for part number 650810/ss/R9/o.
2. Calculate the lot size for part number 650810/ss/R9/o if FabQual were to use an economic
Order quantity (EOQ).
3. Calculate the total annual cost of using an economic order quantity for part number
650810/ss/R9/o?
4. Determine the reorder point for part number 650810/ss/R9/o if demand was always occurring
At the uniform rate of 300 units per week.
6. Determine the cost implications of a change from the present scheme to one based on the
Economic order quantity.