OPERATIONS & PRODUCTION

MANAGEMENT

WAC ASSIGNMENT

SUBMITTED TO: DR. KAMRAN MUMTAZ

MCLEOD
MOTORS
Written Analysis of Case (WAC)

The document contains WAC of Mcleod

Motors.

M SHAHZEB KHALIL (10564)

3/21/2016
 FOREWORD
McLeod Motors Ltd, a British motors manufacturing company has just introduced a new design
part of BN-88-55 end shield in their motors so as they can minimize their manufacturing cost.
The goal has partly achieved, however, they are now facing a problem with increased store
keeping/inventory cost. The very analysis of the case will shed light on the tradeoff between batch
size and manufacturing cost. As it is prudent to state that in routine, most of the times, it is the
larger batch size which proves itself helpful in manufacturing in terms of reduced set up times,
variable costs and get bulk discounts from the suppliers. However, as a matter of fact, it will also
create hurdles for the company such as increased required space, extra care leading to extra
inventory keeping costs etc. In addition to this, by production on a large scale, we often
compromise on flexibility factor as well.

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 MCLEOD MOTORS LTD
INTRODUCTION
McLeod Motors, a British Columbian motors manufacturing company, used to make forty (40)
different models of electric motors with diverse power ranges. Their primary customers were in
original equipment manufacturer market (OEM), who used their motors as a major element both
in their final product as well as in the replacement market. In recent times, company has
confronted problems in its inventory management as it has standardized BN-88-55 end shields
assuming that it would both minimize manufacturing cost and improve overall inventory
management. However, the results were not as per the expectations of the Vice President, John
Ingram.

LOCATION OF INVENTORY
Primarily, Mcleod’s plant was divided into three different regions. A major portion was reserved
for motors production, second portion was for a small office and the last one was for its warehouse.
Warehouse was used for the storage and handling of the raw material, work-in-process (WIP) and
finished goods.

THE PROBLEM
Owing to recent uplift in sales, Mcleod Motors decided to introduce a newly designed end shield
(a motor component) which they codenamed as BN-88-55. The design was truly versatile in its
nature as it had the capability to replace around fifteen (15) other end shields in a single motor
product line. Owing to this, it was highly expected that this end shield has the ability to sharply
slice down the manufacturing cost along with inventory level. However, to the utter
disappointment, upon analysis, after some time, it was discovered that with the newly designed
end shields, though manufacturing costs went down but the inventory level was continuously
increasing. The situation was alarming for the Mcleod’s management.

OPERATIONS INVOLVED:
1- Tap four holes, concave face
2- Tap four holes, convex face
3- Turn convex face
4- Turn concave face
5- Inspect and finish

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 TAPPING TAPPING TURNING TURNING
Final
(Concave (Covex (Convex (Concave
Inspection
Face) Face) Face) Face)

PROCESS FLOW DIAGRAM

Wareh
ouse

Turni Turni
Tap ng Final
Tap ng
Conca Conve Inspec
Covex Conca
ve x tion
WIP WIP WIP ve WIP

ANALYSIS
Strategy: After reading the case, it can be stated that the company is focused on high volumes and
reduced costs. Furthermore, they are also going to reduce their stock keeping units (SKUs) from
36 to only 5 types. Looking at this strategy, it seems that McLeod is moving towards nothing but
“Standardization”.

FLEXIBILITY

QUALITY SPEED

COST

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 Process Type: As all of the machines are assembled in way to facilitate the process, so it is a
processed based – Batch process.

CAMPARISION TABLE

Parameters Standard Before BN-88-55 With BN-88-55

Order Size Per Week (Q) 2500 2475 2496
Unit Cost ( C ) $ 8.30 $ 8.30 $ 8.30
Cost Of Ordering (CO) $ 15.75 $ 15.75 $ 15.75
Annual Demand (AD) 130000 133650 134784
Annual Inventory Carrying
Cost (AIC) 7.86% 8.28% 8.21%
Actual Annual Inventory $ 815.00 $ 818.61 $ 850.50
Standard Annual Inventory
Cost 65000 $ 66,825.00 $ 67,392.00

MATHEMATICAL CALCULATIONS
Standard Demand and Inventory Analysis:
 Order Size (Q) = 2500 per week
 Unit Cost (C) =$8.3
 Cost of Ordering (CO) = 10 min [3.1 min = $0.77] + unit cost
= $7.45 + $8.3 = $15.75
 Annual Demand (AD) = 2500 * 52 = 130,000 units
 Annual inventory carrying costs (AIC) =?

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 Q = (2)(AD)(CO) / (AIC)(C)

2500 = (2*130000*15.75) / (AIC)(8.3)

AIC = 7.86% (annual inventory carrying cost as a fraction of unit cost)

Annual Inventory Cost = (AIC)(C)(Q) / 2

= (.0786*8.3*2500) / 2 = $815

Standard Annual Inventory (Q / 2)*52 = 1250*52 = 65000 units per year

Actual Demand and Inventory Analysis (Before BN-88-55):

 Order Size (Q) = 15 * 165 units = 2475 units per week

 Unit Cost (C) =$8.3
 Cost of Ordering (CO) = 10 min [3.1 min = $0.77] + unit cost= $7.45
+ $8.3 =$15.75
 Annual Demand (AD) = 2475 * (52+2) =133,650 units
 Annual inventory carrying costs (AIC) =?

Q = (2(AD)(CO) / (AIC)(C)

2475 = (2*133650*15.75) / (AIC*8.3)

AIC = 8.28% (annual inventory carrying cost as a fraction of unit cost)

Annual Inventory Cost = (AIC) (C) (Q) / 2

= (.0828*8.3*2475) / 2 = $818

Additional Inventory Cost = $850.5 + 25%

= 815 + 212.6

= $1063.1

Standard annual Inventory (Q/2)*54 = 1237.5*54= 66,825 units per year

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 Actual Demand and Inventory Analysis (After BN-88-55):
 Order Size (Q) = 2496
 Unit Cost (C) =$8.3
 Cost of Ordering (CO) = 10 min [3.1 min = $0.77] + unit cost= $7.45
+ $8.3 =$15.75
 Annual Demand (AD) = 2496*54= 134,784 units
 Annual inventory carrying costs (AIC) =?

Q = (2(AD)(CO) / (AIC)(C)

2496 = (2*134784*15.75) / (AIC*8.3)

AIC = 8.21% (annual inventory carrying cost as a fraction of unit cost)

Annual Inventory Cost = (AIC)(C)(Q) / 2

= (.0821*8.3*2500) / 2 = $850.5

Additional Inventory Cost = $815 + 25%

= 815 + 212.6

= $1063.1

Standard Annual Inventory (Q/2)*54 = 1248*54= 67,392 units per year

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 CONCULUSION
After introduction of new end shield, McLeod Motors surprisingly experienced an increase in
batch size. This actually reduced the set up times which ultimately helped them to produce more
than that in given time. However, this increment had a negative impact on the overall inventory
cost of Mcleod Motors. As it can be seen in the comparison table that after BN-55-66 the annual
inventory cost jumped to 67,392 from units 66,825 units.

It is pertinent to mention here that small-batch production and one-piece-flow are NOT new
concepts in operations. The Toyota production system is a prime example of efficient small-batch
production, and it was developed soon after World War II. One-piece-flow, meanwhile, has been
around since the days of Henry Ford – the sponsor of the development of assembly line technique
of mass production. In other words, both have been successfully utilized for a long, long time.