3Js analysis report 05 - Lecture notes Case PDF

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3J&J case analysis report Submitted by ABHILASH UNNIKRISHNAN RADHAMANI (EPGCOM-12-002), CYRIL THOMAS (EPGCOM-12-009), SANDESH RAJASHEKARA (EPGCOM-12-019), ZAYEEM KHAN (EPGCOM-12-021) Overview of the Problem faced by Three Jays Corporation Jana Fremont started Three Jays Corporation in 2005. Three Jays Corporation is a subsidiary to Fremont Jams and Jellies (FJ&J). With growing trend in organic foods, Three Jays Corporation has increased its production in order to meet the growing demands. However, the company believes that in order to keep up with this growing trend, company needs to run some attractive marketing campaigns. The company feels that reduction in current inventory level would help save them a major share of the revenue which can be invested in these campaigns. Hence, they felt that there was a need to make immediate changes to the existing model of inventory handling. EOQ and ROP calculations and comparison based on current process followed at 3Js Key observations: •

The EOQ and ROP calculations for year 2011 (based on 2010 volumes) were taken from the exhibit 2 of the given case. EOQ and ROP calculation for 2011 based on 2010 volumes Exhibit 4: EOQ and ROP Calculation Using Existing Method Annual % Total Set Up Cost Demand Carrying Unit Cost ( EOQ ROP (S)* C )*** (Cases) (Cases) 12 ounce Jar (D)** Cost (i) Strawberry Jam 63.70 2,993 9% 28.34 387 173 Raspberry Jelly 63.70 2,335 9% 30.52 329 135 Peach Jam 63.70 1,492 9% 26.86 280 86 Blueberry Jam 63.70 886 9% 29.01 208 51 Apple/Mint Jelly 63.70 625 9% 26.32 183 36 *= 5.75+30.25+4.70+23.50 (from Exhibit 3 ) ** 2010 Annual Demand ***Full cost from Exhibit 4

•

The EOQ and ROP calculation for year 2012 was done based on the sales data given in exhibit 5 EOQ and ROP calculation for 2012 Exhibit 4: EOQ and ROP Calculation Using Existing Method Annual % Total Set Up Cost Demand Carrying Unit Cost ( EOQ ROP (D)** Cost (i) (S)* C )*** (Cases) (Cases) 12 ounce Jar Strawberry Jam 63.70 3,869 9% 28.34 440 223 Raspberry Jelly 63.70 3,006 9% 30.52 373 173 Peach Jam 63.70 1,970 9% 26.86 322 114 Blueberry Jam 63.70 1,211 9% 29.01 243 70 Apple/Mint Jelly 63.70 832 9% 26.32 212 48 *= 5.75+30.25+4.70+23.50 (from Exhibit 3 ) ** 2012 Annual Demand ***Full cost from Exhibit 4

•

The EOQ and ROP calculation for year 2013 based on the assumptions shown in the following exhibit EOQ and ROP calculation for 2013 based on computed volumes from 5 months Exhibit 4: EOQ and ROP Calculation Using Existing Method Annual % Total Set Up Cost Demand Carrying Unit Cost ( EOQ ROP (D)**** Cost (i) 12 ounce Jar (S)* C )*** (Cases) (Cases) Strawberry Jam 63.70 6,888 9% 28.34 587 397 Raspberry Jelly 63.70 6854.4 9% 30.52 564 395 Peach Jam 63.70 1420.8 9% 26.86 274 82 Blueberry Jam 63.70 1262.4 9% 29.01 248 73 Apple/Mint Jelly 63.70 1152 9% 26.32 249 66 *= 5.75+30.25+4.70+23.50 (from Exhibit 3 ) ***Full cost from Exhibit 4 ****Assumption : Annual demand 2013 is assumed by obtaining the average volume of first 5 months to be computed for rest of the year (average annual demand (based on data from jan-may) (2868/5)*12 months = 6888

Comparisons of EOQ and ROP for the year 2011, 2012 & 2013 EOQ model observations

• •

Gradual increase in EOQ for 5 SKUs from year 2011 to 2013 due to rise in demand for organic products Only peach jam shows 18% decrease in EOQ from year 2012 to 2013 while other SKUs are increasing up to 34%.

ROP model observations

• •

Gradual increase in ROP for 5 SKUs from year 2011 to 2013 due to rise in demand for organic products Only peach jam shows 39% decrease in ROP from year 2012 to 2013 while other SKUs are increasing up to 56%

Current and Revised Cost models There are discrepancies with the calculations done by brodie (shown in exhibit 2). The Following table discusses the suggestions and their justifications that must be taken in order to overcome the shortcomings of Brodie’s calculation

Current Cost models Purchase order cost: Three Jays corporation current cost model has Set up cost includes the PO/ordering cost (Administrative cost) Cooking, cleaning & Manufacturing pre cost: Three Jays corporation full time employee Emma & Julia contribute 30.25$/Batch for this cost component *Data obtained from case study (exhibit 2 setup cost)

Proposed/ revised Cost model Purchase order cost: Proposed cost model does not have any PO/ordering cost (Administrative cost)

Cooking, cleaning & Manufacturing pre cost: Consider only one time set up cost for every batch in the month (1 % is only considered as set up cost, as employees does other work) • 30.25$ → (0.01) *30.25 o 0.325$/month/batch o 0.325*12 o 3.9$ Annually

Cost occurred due to change of size of jar: 30 mins is required by jack & josh to change the jar size • 23.5 $/hr→23.5/60 o 0.391*30*2 o 23.5 $/batch • 23.5$/5 → 4.7 $/SKU

Cost occurred due to change of size of jar: Remove the cost contribution of Jack & josh and add the cost occurred by 3 Part time employee who are idle during the change over time • 12.5$/hr→ 12.5/60 o 0.208*3*30 o 18.72$/batch • 18.72$/5→ 3.74 $/SKU

Production cost: Production cost considered from FJ&J employees

Production cost: Production cost contribution for FJ&J removed, only part time employee cost added. • 12.5$/hr→ 12.5/60 o 0.208*3*30 o 18.72$/batch

Justification for Proposal Employee of FJ&Js are ordering for both FJ&Js and Three Jays, so to avoid duplication we need to remove this component from revised cost model Both Emma & Julia are involved in other research & development when not working on production line also their salary does not depend on the no. of set ups done so we can reduce their cost impact by considering 1% as set up cost per month. Jack & Josh are full time employee of FJ&J ,& this is not depending on the no. of batches running annually , so we can remove this cost and add the cost of 3 Part time employees paid by 3Js who are idle during the change over time, there idle cost needs to be added to the set up cost Similarly, to the cost occurrence in the size of jar, cost component contribution of Fj&j employees is removed. No time frame provided by quantity of work done for

part time employees, so their full pay is considered Back order log discount cost: Current model does not consider any discount for order back log

Inventory carrying cost: Current cost model consists of 9% cost inventory cost

Back order log discount cost: Consider a 1% discount on order back log considering that we fail to delivery on time • 1% of unit cost o 0.01*unit cost Inventory carrying cost: Revised model consists of 9% inventory + 1% safety /buffer stock= 10%

Back order discount is required to ensure the business continuity with customers during a delay in delivery due to untoward situations Safety cost considered in order to build inventory during sudden spike demands.

EOQ and Safety stock comparison based on new suggested model EOQ 2010 current model Exhibit 4: EOQ and ROP Calculation Using Existing Method Annual Back order Total Set Up Demand % Carrying Cost discount final unit Unit Cost ( EOQ Cost (S)* (i) cost C )*** (Cases) ROP 12 ounce Jar (D)** cost Strawberry Jam 63.70 2,993 9% 0.00 0.00 28.34 387 Raspberry Jelly 63.70 2,335 9% 0.00 0.00 30.52 329 Peach Jam 63.70 1,492 9% 0.00 0.00 26.86 280 Blueberry Jam 63.70 886 9% 0.00 0.00 29.01 208 Apple/Mint Jelly

63.70

625

9%

0.00

0.00

26.32

183

safety stock (Cases) remainig 173 214 135 194 86 194 51 157 36

147

*= 5.25+30.25+4.70+23.50 (from Exhibit 3 ) ** 2010 Annual Demand ***Full cost from Exhibit 4 EOQ 2012 revised model Exhibit 4: EOQ and ROP Calculation Using Existing Method

12 ounce Jar Strawberry Jam Raspberry Jelly Peach Jam Blueberry Jam Apple/Mint Jelly

Total Set Up Cost (S)* 26.38 26.38 26.38 26.38 26.38

final unit cost Annual % Carrying Cost Back order safety ( after adding Unit Cost ( EOQ ROP Demand (9%)+ safety discount stock new cost component) C )*** (Cases) (Cases)**** remainig (D)** cost ( 1%) cost 3,869 10% 0.28 28.62 28.34 267 228 39 3,006 10% 0.31 30.83 30.52 227 179 48 1,970 10% 0.27 27.13 26.86 196 116 80 1,211 10% 0.29 29.30 29.01 148 71 77 832 10% 0.26 26.58 26.32 129 49 80

12 ounce Jar Current process cost (in$) Strawberry Jam 11346.4 Raspberry Jelly 9624.3 Peach Jam 5644.6 Blueberry Jam 3851.8 Apple/Mint Jelly 2520 Total 32987.1

Proposed model cost(in$) 9522.1 9170.7 7948.4 7025.2 5876.0 39542.3

Model

Total Cost in $

Safety Stock cases

Current Process Proposed Model Difference Profit

32987.0644 39542.3194 6555.3 20%

962 323 -639.0 -66%

Key Outcomes The Present models as suggested by Brodie and the the scheduling method followed by jake and josh do not consider the fluctuation in demand, moreover jake and josh are producing the units based on intuition, leading upto stocking up in inventory. The proposed model takes into consideration the fluctuation in demands on both front pull and back pull scenario. It has given priority to reduction of stocked inventory as shown in the above tables simulatneously improving the ROP. The inventory stock has significantly reduced from 2010 to 2012 even though there is significant increase in demand from 2010 to 2012 On comparison of the total cost for Jake and Josh method and proposed model we can conclude that the method followed by jake and josh is leading upto stocking up of inventory in the name of safety stock hence increasing the total cost while the proposed model reduces the amount of safety inventory stocked while decreasing the toatl cost for 3J &J. The proposed model has decreased the company’s inventory by 66% and increased the profit by 20%.

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