NORTHEASTERN UNIVERSITY

MARS Inc.
Open with Caution
Anshul Gupta Roopsi Chalana

MARS INC. Anshul Gupta and Roopsi Chalana Background MARS Inc. manufactures 98-D loader. It requires D-342 engines for the production of each loader. Its current Columbus based supplier for D-342 will be discontinuing the production of the engines due to a decline in sales. Now MARS is forced to deal with the remaining sole supplier based in Portland. Since the current Columbus based supplier is in close proximity to the manufacturing facility of MARS, it is able to provide just-in-time delivery service without any cost.

Problem Since the new supplier is based in Portland, it may impact MARS JIT production system. Besides that, it also adds an associated transportation costs for deliveries from Portland. With these new developments, MARS must consider the volume discounts and warehouse constraints to determine the best order quantity, understand the new cost structure and estimate the impact on sales.

Current Cost Structure

# Units/order # Orders Total Cost of engines Total Ordering Cost Average Inventory Total Inventory Carrying cost Total Unloading cost Total Inv. Cost Total Cost 50 48 $11,520,000 $4,800 25 $45,600 $3,000 $53,400 $11,573,400

Annual demand Cost per engine # Orders Cost of order processing per requisition Order Size/2 Average Inventory Inventory Carrying Cost Cost per engine (Cost of unloading Weight per order #orders)/100 Total Inventory Carrying Cost + Total Ordering Cost + Unloading Cost Total Inventory Cost + Total Cost of engines

MARS INC. Anshul Gupta and Roopsi Chalana MARS spends approximately $11.57 million with its current supplier to meet its annual demand. Since the current supplier offers just-in-time delivery service, the Inventory Carrying Cost is low. However, MARS is unable to take advantage of the volume discounts because of the small order size associated with the JIT system.

New Cost Structure

EOQ Q Price/unit # Units/order # Orders Total Cost of engines Carrying Cost/Engine Total Inventory Carrying cost Total Ordering cost Trans Cost/order Total Transportation Cost Total Inventory Cost Total Cost EOQ=17 16.22 $4,800 17 142 $11,520,000 $1,825 $15,515 $14,118 $1,275 $181,050 $29,632 $11,730,682 EOQ = 101 $4,700 101 24 $11,280,000 $1,787 $90,256 $2,376 $5,075 $120,594 $92,632 $11,493,226 EOQ = 201 $4,500 201 12 $10,920,000 $1,730 $173,890 $1,200 $10,075 $120,900 $175,090 $11,215,990

The table above shows the new cost structure at different price breakpoints. Since the Portland supplier is located relatively far, the cost structure has a new element in the form of Transportation Cost. Total Cost is calculated using EOQ at break quantities while considering the volume discounts.

We can note that in spite of the increase in inventory carrying cost and added transportation cost from the current cost structure to the new structure, the total cost at EOQ=101 & 201 are lower. This is mainly attributed to the volume discounts for the cost of engines. Besides the volume discounts, there are also some savings in

MARS INC. Anshul Gupta and Roopsi Chalana the new cost structure due to the lower number of orders associated with the larger order sizes. It can be concluded that the best order quantity would be 201, since it can: a) Capture the maximum volume discount b) Keep the Inventory Carrying Cost relatively low

Impact on lean manufacturing With the new EOQ model, MARS faces a larger Inventory Carrying Cost. Besides the higher inventory, MARS also faces cost of obsolescence, damage, insurance, handling and floor space. There is also an added transportation cost with the new supplier, which will increase the overall Carbon Footprint of the company.

Impact on Sales The new model will not have any major effect on the sales of the 98-D loader. Since the order size with the supplier will not have any impact on the lot size of manufacturing, it will have the same lead-time as earlier. This will enable the company to fulfill order from customers in the same amount of time as earlier. However, the greater environmental impact due to the Carbon Footprint from transportation can impact the reputation of the company, affecting companys Corporate Social Responsibility and ultimately the sales in a negative manner.

MARS INC. Anshul Gupta and Roopsi Chalana Recommendations Although moving away from lean manufacturing practices presents some limitations, MARS can still manage the situation. It should consider the following:

Manage Sole Supplier Risk: Since Portland would be the sole supplier now; MARS should manage the risk in case of supplier shutdown or delay. It should keep additional Inventory on-hand to overcome potential delay in supply due to natural and political causes. It should look for an alternative solution to come up with a disaster recovery plan in case of a supplier failure. It should understand the unique capabilities of the sole supplier and should have a plan to either build or source those capabilities in the worst-case scenario.

Supplier Relationship and Innovation: MARS should be careful in maintaining a healthy relationship with its supplier. It should look to capture higher volume discounts through negotiations and work closely with the supplier to create a win-win situation. It should also look for Supplier Involvement in the production process for product development and innovation.

Adjust lot size for maximum efficiency: Since MARS now has Inventory onhand; it should take maximum advantage of the associated flexibility that comes along with it. It should make modifications to the lot size based on shift scheduling, constraints of material usage and production process to maximize its efficiency.

MARS INC. Anshul Gupta and Roopsi Chalana Freight Consolidation: In order to reduce their Carbon Footprint, MARS should also look into Freight Consolidation by either choosing a different transportation mode or carrier, in order to not have a negative impact on its sales.

Real World Example Ariens Company was a leading manufacturer of outdoor power equipment for both professional and consumer use. In the peak season of 2008, one of its major supplier for the engines of the snow machines for decades informed that the supplier is shutting down the production in 60 days. Because of the economic recession, other manufacturing facilities were slowing down their operations. Ariens managed the suppliers by reviewing their financial viability and the pricing structure. Ariens reconsidered its product development thinking that consumer would not be willing to spend more. The company examined each step of the facility operations to eliminate waste in order to reduce costs and by squeezing efficiency from suppliers, workers, facilities, machines, operations and delivery design networks. Ariens also made changes to its operational network by having their professional customers providing direct services to the end users. Finally, Ariens was able to successfully overcome the supplier shutdown by making modifications to its production, delivery and operational network.

Source: WSJ