OPERATIONS MANAGEMENT

DIGITAL ASSIGNMENT – 2

SUBMITTED BY,
Muthu kumar.S
17MBA0109
 ABC ANALYSIS

The store of an oil engine repair shop has 10 items whose details are shown in the
following table. Apply ABC analysis to the store.

Annual
Component Demand
Code Description Price/Unit units/Year
Packing
C01 Thread 150 90
C02 Tower Bolt 250 250
Hexagonal
C03 Nut 100 800
C04 Bush 250 450
C05 Cupling 650 900
C06 Bearings-big 2500 40
Bearings-
C07 small 1700 120
C08 Fuel Pump 8000 550
C09 Fixture 4500 110
C10 Drill Bit 80 1200

SOLUTION –

Preliminary Working

Annual
Component Demand Annual
Code Description Price/Unit units/Year Cost
Packing
C01 Thread 150 90 13500
C02 Tower Bolt 250 250 62500
Hexagonal
C03 Nut 100 800 80000
C04 Bush 250 450 112500
C05 Cupling 650 900 585000
C06 Bearings-big 2500 40 100000
Bearings-
C07 small 1700 120 204000
C08 Fuel Pump 8000 550 4400000
C09 Fixture 4500 110 495000
C10 Drill Bit 80 1200 96000
Final Working of ABC analysis

Annual
Demand
Componen Price/Uni units/Yea Annual Cummulativ
t Code Description t r Cost e Cost
440000 70%
C08 Fuel Pump 8000 550 0 4400000 Class A
C05 Cupling 650 900 585000 4985000
20%
C09 Fixture 4500 110 495000 5480000 Class B
Bearings-
C07 small 1700 120 204000 5684000
C04 Bush 250 450 112500 5796500
Bearings-
C06 big 2500 40 100000 5896500
10%
C10 Drill Bit 80 1200 96000 5992500 Class C
Hexagonal
C03 Nut 100 800 80000 6072500
C02 Tower Bolt 250 250 62500 6135000
Packing
C01 Thread 150 90 13500 6148500

Summary of ABC items

Component
Code Description Class
C08 Fuel Pump A
C05 Cupling B
C09 Fixture B
Bearings-
C07 small B
C04 Bush C
C06 Bearings-big C
C10 Drill Bit C
Hexagonal
C03 Nut C
C02 Tower Bolt C
Packing
C01 Thread C
 MANUFACTURING MODEL WITH SHORTAGE COST

Demand rate of an item in a company is 24000 units per year. The company can produce the
item at rate of 3000 unit. The set up cost is Rs. 600 per set up and the holding cost is Rs
0.20/ unit/ month. Shortage cost is Rs. 25/ unit/ year.

Determine

• Optimum manufacturing quantity

• Number of shortages
• Manufacturing time
• Time between set ups

D- 24000 units/year, 2000 units/month

R- 3000 units/month

C2-Rs. 600/set up

C3- Rs. 0.20/unit/month

C4- Rs. 2.08/unit/month

SOLUTION –

Optimum Manufacturing Quantity

Q=√(2DC2/C3)*(R/R-D)*(C3+C4/C4)

=6281 units

Number of Shortages

S= √(2DC2/C4)*(R-D/R)*(C3/C3+C4)

=184 units

Manufacturing time

= Q/R

=2 months

Time between set ups

=Q/D

=3.14 months
 PURCHASE MODEL WITH SHORTAGE COST

The demand rate for a particular item 18000 units/year. The cost of one purchase is Rs
400. The carrying cost is Rs. 1.2/unit/year. The cost of 1 item Rs. 1. Shortage cost is Rs. 5/
unit/ year.

Calculate:

• Optimum order quantity

• Optimal time between order
• No. Of orders per year
• Optimum shortages
• Maximum intventory
• Optimum annual cost

SOLUTION –

D= 18000 units / year

C1= 1/ item

C2= 400/ order

C3= 1.2/unit/year

C4= 5/unit/year

Optimum order quantity

= √(2DC2/C3)*((C3+C4)/C4)

= 3857 units

Time between order

= Q/D=2.56 Months

Number of orders per

year

= D/Q= 4.66

Shortage

=√(2DC2/C4)*(C3/C3+C4)
= 747 Units
Maximum Inventory

= Q-S= 3110 units

Total Cost per order

= C1Q+C2+ [C3(Q-S)^2]/2D + C4S^2/2D

= RS. 4657.45

ANNUAL COST= TOTAL COST/ ORDER * NO OF ORDER

= RS. 21703.76

EOQ WITH TWO PRICE BREAKS

Find the Optimum order quantity for which the price is

Order quantity

0<Q1<800

Q2>= 800

Purchase cost per unit

P1= Rs. 1

P2= Rs. 0.98

Annual Demand = 1600 units

Cost of ordering = Rs.5

Holding cost = 10% / year

SOLUTION –

Q2= √(2DC2)/(I*P2)

=408.06 units

Q2 < b

Q1=√(2DC2)/(I*P1)

= 400 units
Q1<b

Total Cost (Q1) = D*P1 +[ (D*C2)/Q1 ]+[(Q1*C3)/2]

= Rs. 1640

Total Cost (b) = D*P2 + [(D*C2)/b] + [(b*C3)/2]

= Rs. 1617

TC(b) < TC(Q1), so EOQ is b and should accept price discount