Operations

Management
XYZ co. for Alkyd
resin Student #
Module #
Anwer Mohiuddin Module # MBA7061
Table of Contents
Executive summary.........................................................................................................................1
Introduction....................................................................................................................................1
Corporate Vision:........................................................................................................................1
Strategic objectives.....................................................................................................................1
The Core Competencies of XYZ Co..............................................................................................1
Product:......................................................................................................................................1
Identifying Issues............................................................................................................................1
Key Operations Management issues faced by XYZ:.....................................................................1
Forecasting:.............................................................................................................................1
Production process.................................................................................................................1
Quality....................................................................................................................................1
Suppliers.................................................................................................................................1
Inventory.................................................................................................................................1
ORDER FULFILLMENT..............................................................................................................1
OVERALL CONCLUSION...................................................................................................................1
Purpose and Limiting Conditions................................................................................................1
Financial Results and Interpretations......................................................................................1
ANNEXURE......................................................................................................................................1
References......................................................................................................................................1
Executive summary

As an Operations Management Consultant, XYZ has engaged me to study their

operations and determine how it can improve its operations management by
improving forecasting accuracy, minimizing waste, developing supplier relations,
etc by using its current resources in a cost effective manner

XYZ Company is an Egypt-based Company, established in 1998 in Borg El Arab

industrial zone, the company is owned by mainly 3 shareholders. The company is
producing Alkyd resin for the paint industry. The installed annual capacity is 200,000
tons of resins, and the sales turnover for 2013 and 2014 was 13.043 and 15.0 million
EGP (Egyptian Pounds), respectively.

The company strategy is based on cost leadership and the company is committed to
use its resources in cost effective manner and want to increase its market share in the
local market as well aiming to expand internationally (in Africa) in the upcoming
years.

The company is having some operational management issues in different functions

like; forecasting, inventory control, production process, quality and order
fulfillment. Relationship with suppliers is not ideal due to frequent supply related
problems and overall cost of quality is more, consequently the price does not remain
competitive and resulted in sales drop.

As a part of case study, the Operations Management issues of XYZ Company were
identified and critically discussed the most appropriate topics, techniques, methods,
models and tools available, providing detailed justification for its use. The different
alternatives pertinent to each issue is identified and suggested so that the XYZ
Company starts operating with more professional approach to achieve their objective
of increasing the market share.

The solutions proposed are comprehensive in nature. This is because, all solutions to
the existing problems complement each other. The core problem that the company
faces is the incoherence of the strategy and the decisions that the company takes. The
solution also addresses the core problem along with resolving the factors resulting
from this core problem.
The Key strategic recommendation is cost management in terms of international
suppliers needs to be done so that the company attain its objectives. Furthermore,
since the product is highly standardized, the solutions proposed do not recommends
the customization of the product. Therefore, it emphasizes on maximizing capacity
utilization and eliminating the JIT inventory system. The JIT inventory system is only
beneficial for companies that produce products that can deteriorate in a short time or
those companies that produce customized product offerings. Also, the company is
unable to manage the costs along with managing the quality. [ CITATION kum96 \l
1033 ]
Introduction

XYZ Co is an Egypt-based company commenced commercial operation in the year

1998, XYZ Company located in Borg El Arab industrial zone. The company engaged
in the production of Alkyd resin for the painting industry.

Establishment Year 1998

Company Location
Borg El Arab Industrial zone, Egypt

2014 total Sales EGP 15 million

Major Shareholders
Mainly Three (3) Shareholders

In general, modern paint is a complex mixture of components that comprises binder

(resin), additives, pigments and solvents. Binders (resins) are considered as a crucial
component that is present in all types of paints. It binds or glues ingredients (pigments
and additives) of paint together and provides durability & resistance properties to the
paint. Binders (resins) come in several forms such as Latex, Alkyd, Epoxy and
Polyurethane in accordance to its industrial usage. In alkyd paint, the binder is a
synthetic resin, which is called an alkyd resin. Alkyd resin is used in varnish, lacquer,
sealer, etc.

The total sales for XYZ were around 15 Million Egyptian pounds during year 2014
with current growth rate standing at 15% over 2013. The company is operating under
a strategy that aims to minimize the overall cost of operation (cost leadership).

However, in 2015, the sales numbers were not worthy. Sales remained almost constant
(and sometimes decline) for the fifth straight month while the market is still
expanding (local and regional). On the other hand, competitors are increasingly taking
market share on the company expense.
Corporate Vision:

The XYZ Corporate Vision statements focuses on the following key areas:

 Cost Leadership.
 ensuring a quality product.
 To increase customer satisfaction level.
 To enter into African Market

A clear corporate vision ensures that the company can work towards meeting its goals
thereby increasing its sales by increasing the customer satisfaction level by providing
quality product meeting the customer expected timeline.

Strategic objectives

Strategic objectives adhere to the company’s vision statement, XYZ key

Strategic objectives are:
 Target Local market growth by regaining its market share and expand year by year.
 Enter into African market that will utilize its excess capacity and optimize fixed
cost.
 be competitive by providing low cost product without compromising on quality and
delivery.
 Enhance customer satisfaction level by providing high quality products and
services such as delivery, customization, customer feedback etc.
Passion
It
The Core Competencies of XYZ Co.

XYZ core competencies have evolved over time. They have been in the market for
around 18 years. There is a fair degree of production flexibility in terms of product
customization. They are keen about the quality of the product. They have a enough
Capacity (design capacity) of 200,000 tons of alkyd resins each year that enable them
to expand their market.
There are two types of alkyd resins, drying (including semi drying) and nondrying.
Both types are typically produced from dicarboxylic acids or anhydrides, such as
phthalic anhydride or maleic anhydride, and polyols, such as trimethylolpropane,
glycerine, or pentaerythritol. Alkyds are also used in items such as resins and paints.

Product:

Paints possess a noticeable spot in the social history of humankind. Individuals have
dependably been intrigued with hues and utilized paints for two primary reasons;
enrichment or insurance to an article or surface. A paint or covering is characterized
as a fluid or mastic sythesis intended to go about as a slim layer which is changed
over to a follower film in the wake of being connected. Paints and coatings contain
particular fixings that all assume a part in their execution properties including
sturdiness and last appearance.

Binders (resins) are considered as an essential part that is available in a wide range of
paints. It ties or pastes fixings (colors and added substances) of paint together and
gives sturdiness and resistance properties to the paint. Folios (pitches) come in a few
structures, for example, Latex, Alkyd, Epoxy and Polyurethane in understanding to its
modern use. In alkyd paint, the cover is a manufactured resin, which is called an alkyd
gum. Alkyd resin is utilized as a part of varnish, finish, sealer, and so forth.

XYZ's at present occupied with the generation of Alkyed gum for the canvas business.
An alkyd is a polyester changed by the expansion of unsaturated fats and different
parts. Initially, the word alkyd was "alcid", mirroring the way that they are gotten
from liquor and natural acids. The consideration of the unsaturated fat gives a
propensity to frame adaptable covering.

XYZ’s currently engaged in the production of Alkyd resin for the painting industry
and have a max. Capacity (design capacity) of 200,000 tons of alkyd resins each year.

Historically, XYZ’s sales have increased by more than 15% during the period
Y2014.
Following are the monthly sales units growth in Year 2014 over Y 2013.

Monthly Sales Units

Month 2013 2014 Growth
Jan 6000 7600 27%
Feb 6200 7700 24%
Mar 6400 7900 23%
Apr 6500 8000 23%
May 6700 8000 19%
Jun 6800 8100 19%
Jul 7000 8200 17%
Aug 7200 8300 15%
Sep 7300 8500 16%
Oct 7500 8600 15%
Nov 7500 8600 15%
Dec 7600 8800 16%
Total Sales 82,700 98,300 19%
Identifying Issues

Key Operations Management issues faced by XYZ:

1. Forecast Accuracy

2. Sales Achievements

3. Utilization of Excess Capacity

4. Minimizing wastages and address Quality Issues

5. Increase Market Share

6. Improve Supplier’s delivery

7. Improve Customer deliveries

Forecasting:

It is obvious that the XYZ company has problem not only in sales forecasting but also
achieving the sales targets. The company is not having any issue till 2014, however
after 1st Qtr 2015 they are facing problem related to sales achievement which resulted
in inaccurate forecasting.

Forecasts are a fundamental contribution to the choice procedures of operations

management since they give data on future interest. The significance of anticipating to
operations administration can't be exaggerated. The essential objective of operations
management is to match supply to demand. Having a forecast of interest is vital for
deciding the amount of capacity or supply will be expected to take care of demand.
Case in point, operations needs to comprehend what limit will be expected to settle on
staffing and gear choices, spending plans must be readied, buying needs data for
requesting from suppliers, and store network accomplices need to make their
arrangements.[ CITATION Sil98 \l 1033 ]

Since the Co. is also dependent upon imported raw materials, XYZ Co. should ensure
that they are properly positioned to meet future product demand. Therefore, it is
important for the company to have an efficient and accurate forecasting model to
predict future monthly sales. A major requirement of successful marketing is
accurately forecasting sales. First, market opportunities are identified through
marketing research. The size, growth and opportunity are then measured and/or
forecasted.

Thus, an accurate sales forecast facilitates effective planning. Over-estimates of

demand can lead to several problems, such as occupancy of valuable shelf space and
increased inventory carrying charges. On the other hand, under-estimates of demand
can lead to stock depletion, lost sales, and expensive overtime production to
compensate for costumer demand.

Sales forecasting is an administration capacity that organizations frequently neglect to

perceive as a key contributor to corporate achievement. From a top-line point of view,
exact sales forecast permits an organization to provide elevated amounts of client
administration. At the point when interest can be anticipated precisely, it can be met in
an opportune and effective way, keeping both channel accomplices and last clients
fulfilled. Exact forecasts help an organization stay away from lost deals or stock-out
circumstances, and keep clients from going to contenders. At all that really matters,
the impact of exact figures can be significant.[ CITATION Tri89 \l 1033 ]

Trigeiro, W. W., L. J. Thomas and J. O. McClain, “Capacitated Lot Sizing with Setup

Times,” Management Science, Vol. 35, No. 3 (March 1989), pp. 353–366.

The XYZ Company is using moving average forecast although forecasting is not
significant activity of XYZ Company due to several factors. Alkyd could be
considered as a highly standardized product, which creates relative stability in usage
requirements.

Two aspects of forecasts are important. One is the expected level of demand; the other
is the degree of accuracy that can be assigned to a forecast (i.e., the potential size of
forecast error). The expected level of demand can be a function of some structural
variation, such as a trend or seasonal variation. Forecast accuracy is a function of the
ability of forecasters to correctly model demand, random variation, and sometimes-
unforeseen events.
Key Approaches

A properly prepared forecast should fulfil certain requirements as per [CITATION

Ste12 \l 1033 ] :

1. The forecast should be timely.

2. The forecast should be accurate.

3. The forecast should be reliable.

4. The forecast should be expressed in meaningful units.

5. The forecast should be in writing.

6. The forecasting technique should be simple to understand and use.

7. The forecast should be cost-effective

Qualitative versus quantitative strategies

Qualitative determining strategies are subjective, taking into account the supposition
and judgment of buyers, specialists; they are proper when past information are not
accessible. They are typically connected to moderate or long-extend choices. Case of
subjective determining techniques are educated sentiment and judgment, the Delphi
strategy, statistical surveying, and chronicled life-cycle similarity.

Quantitative anticipating models are used to figure future data as a component of past
data. They are legitimate to use when past numerical data is open and when it is
sensible to acknowledge that a segment of the case in the data are depended upon to
continue into what's to come. These systems are ordinarily associated with short-or
midway range decisions. Instance of quantitative deciding methods are last period
interest, clear and weighted N-Period moving midpoints, fundamental exponential
smoothing, and multiplicative normal records.
Naïve methodology

Naïve figures are the savviest estimating display, and give a benchmark against which
more modern models can be looked at. In time arrangement information, utilizing
innocent methodology would create estimates that are equivalent to the last watched
esteem. This technique works great for monetary and money related time
arrangement, which regularly have designs that are hard to dependably and precisely
foresee. In the event that the time arrangement is accepted to have regularity,
occasional credulous methodology might be more fitting where the conjectures are
equivalent to the worth from last season. The gullible technique may likewise utilize a
float, which will take the last perception in addition to the normal change from the
principal perception to the last perception.

Linear trend equation Technique:

Trend Equation. A linear trend equation has the form

Ft _ a _ bt (3–8)

where

F t _ Forecast for period t

a _ Value of F t at t _ 0

b _ Slope of the line

t _ Specified number of time periods from t _ 0

The sales pattern of XYZ Company in the previous 2 years has a substantial linear
growth. Ergo the linear trend technique will prove to be fruitful and thus it requires an
in depth analysis.

The linear trend technique is a worthy technique for XYZ, but due to the sales decline
in the previous 5 month has affected the forecasting accuracy. Therefore it has been
excluded it from my recommendation

 The current moving average forecasting technique is not accurate as it has

higher percentage of error
 However weighted moving average and exponential smoothing are
comparatively better results in 2014, whereas the weighted average is
showing less error in 2015 forecast.

YEA Moving Weighted Moving Exponential

linear trend
R Average Average Smoothing
 MAD MAD MAD 125.92 MAD
171 145.3 327

2014 MSE MSE MSE 21967 MSE

38,409 28,318 1,396,945

MAP 2.07% MAP 1.53 MAP 3.93%

MAPE
E E 1.77 E

MAD MAD MAD 337.31 MAD

472.50 236.67 773

2015 MSE MSE MSE 251575 MSE

371,486 169109 738,514

MAP 5.87% MAP 4.18 MAP 9.51%

MAPE
E E 2.92 E

Conclusion:

 It is understandable that XYZ Co. Has glitches in forecasting which is not

considered as a main activity and it seems there is no close coordination
between Sales and Operations. They have to introduce the rolling forecast
for 9 months to 12 months, freezing the forecast for 1 to 3 months, subject
to accuracy. Moreover it is also recommended to use qualitative and
judgmental approach beside the quantitative approach.
 The XYZ Co. has excess capacity and in order to utilize it is utmost
important to increase the sales. The sales performance has been declining
which is also effecting the forecasting. The management has to analyze
deeply the reason of declining sales and take corrective measures to
improve it by introducing some attractive incentives and rectifying the
customer’s complains and addressing quality and other issues.
 In order to regain the market share the XYZ Co. has to grow by approx.
8% this year and 20% next year in order to achieve the same pattern of
 2014 that improve the XYZ situation of forecasting and capacity
utilization besides the market share.
 The following sales projections recommended to improve the XYZ results.
Sales Est Sales Forecast
Sales Y14 Gr/LY Y15 Gr/LY Y16 Gr/LY
Jan 7,600 26.7% 8,900 17.1% 9,835 10.5%
Feb 7,700 24.2% 9,000 16.9% 9,965 10.7%
Mar 7,900 23.4% 9,200 16.5% 10,223 11.1%
Apr 8,000 23.1% 8,000 0.0% 10,353 29.4%
May 8,000 19.4% 8,000 0.0% 10,353 29.4%
Jun 8,100 19.1% 7,600 -6.2% 10,482 37.9%
Jul 8,200 17.1% 7,600 -7.3% 10,612 39.6%
Aug 8,300 15.3% 7,900 -4.8% 10,741 36.0%
Sep 8,500 16.4% 9,897 16.4% 11,000 11.1%
Oct 8,600 14.7% 9,861 14.7% 11,129 12.9%
Nov 8,600 14.7% 9,861 14.7% 11,129 12.9%
Dec 8,800 15.8% 10,189 15.8% 11,388 11.8%
Total 98,300 18.9% 106,009 7.8% 127,211 20.0%
Avg
8,192 18.9% 13,251 61.8% 15,901 12.5%
Cap
utiliz 53.0% 63.6%

Growth Estimated Est. 2106

2013 2014 Est. Gr
% 2015 Growth forecast
8270 9830 127,
18.9% 106,009 7.8% 20%
0 0 211

 XYZ company should take a strategic decision to re-grow the sales in

Egyptian market and to expand their sales in Africa and Middle East to
utilize the available production capacity and gradually increase every
year.Production process

Production Key Issues

XYZ is using batch processing that provides high volume and flexibility to
customized individual orders. The production process of paints requires long time
 because process includes heating and cooling at various levels. The time required to
manufacture a batch of paints is significant. Currently a batch is produced
approximately total 1,120 minutes equal to 18.6 hours. Major time is consumed in
measuring acid value (A.V) & viscosity every hour till reaching an A.V value of 8mg
KOH /g. Takes from 5 to 7 hours; although for healthy operations, this should take 3 ±
0.5 hours on average. Viscosity is not measure after cooling the mixture at
temperature 150 ̊C.

Key Approaches

Draw a flow chart for complete production process of a batch manufacturing and
identify the each step and find the solution to resolve the ley issues of production area.

XYZ current production process for long Alkyd resin are as follow:

Alkyd resin is ready kept in

Cleaning
Cleaning the
the reactor
reactor and
and ensure
ensure continuous
continuous stock and directly send to
flow
flow of
of nitrogen
nitrogen in
in pipelines
pipelines (Avg.
(Avg. 20Min)
20Min)
customer

Transfer the resin to another

Start
Start charging
charging soya
soya bean
bean tank and add the solvent (Avg. 5
oil
oil and
and adding
adding aa catalyst
catalyst Min)
(LiOH)
(LiOH) (Avg.
(Avg. 25
25 Min)
Min)
Start measuring acid value (A.V) &
viscosity every hour till reaching an A.V
Heat the mixture to 180̊C (Avg. 1:30 hour) value of 8mg KOH /g. Takes from 5 to 7
hours;

Add pentaerythritol (PENTA)

Start cooling the mixture at 150(Avg.
̊C (2-20 Min) Continue heating
3 hour)
to
Re-heat the mixture (Avg. 2 hour) reach a temperature of 250 ̊C
(Avg. 1:30 hour)
Wait until monoglyceride
formation is prepared (1 tp 3 Add phthalicanhydride
hours) and maleic anhydride to
cool down the mixture to180 ̊C (Avg. 1:30 hour) the mixture ( 30 Min)

Findings & Justifications.

It concluded that above step number nine in the above flow chart of start measuring
acid value (A.V) & viscosity every hour till reaching an A.V value of 8mg KOH /g
immediate after Re-heat the mixture at temperature of 250 usually viscosity is thick if
measure when material is hot.

We need minor change in the process that start measuring acid value (A.V) &
viscosity after cooling the mixture at temperature of 150 ̊C instead of cooling material
after measuring viscosity.
This step will save 3 to 4 hours due to changer of process measuring viscosity after
cooling the temperature at 150 ̊C.

We also need to improve heating and cooling time of the reactor by proper
maintenance and validation to keep the process standardized which can result saving
of 6 – 7 hours in total manufacturing cycle.

In view of the above discourse, obviously these viewpoints shape a pecking order,
with the problem solving point of view at the most minimal level, the basic leadership
viewpoint in the center, and the hierarchical point of view at the most elevated
amount. Moving among these three points of view compares to moving one's center
from the generation arranging association to one individual to one assignment.
Consequently, this order of points of view does not relate to a fleeting or spatial decay.
It is identified with an errand based decay of the creation booking framework.
[ CITATION Her08 \l 1033 ]
Quality

Quality Key issue

XYZ is strongly emphasized on quality and employees are trained in quality concepts
and the use of quality tools but they provide only on-Job training.

Operations director claimed that they have regular problems coming from quality
problems. He also added that they internally are facing some quality problems that
need special attention. Although all quality problems are resolved before reaching
customers, they are still contributing in raising the costs of operations.

Employees are responsible for performing in-process quality checks (quality at the
source), and to report any defects they discover to their supervisor. However, it
appears that the time needed to perform each step is critical for delivering products to
customers in a timely manner.

The standard deviation of the process is 0.274 hours so, the quality team decided to
collect a sample data (20 samples each with 5 observations) about the current timing
(in hours) of measuring acid value (A.V) & viscosity of 8mg KOH/g.

Quality Samples
1 2 3 4 5 6 7 8
5.5
1 5.50 5.70 5.90 6.00 5.70 5.90 6.00
0
5.6
2 5.60 5.60 6.00 6.10 5.60 6.00 6.10
0
6.0
3 6.00 5.70 6.40 6.20 5.70 6.40 6.20
0
6.4
4 6.40 5.90 6.30 6.40 5.90 6.30 6.40
0
6.7
5 6.70 6.00 6.40 6.30 6.00 6.40 6.30
0
30.
Total 30.2 28.9 31.0 31.0 28.9 31.0 31.0
2
Averag 6.0
6.04 5.78 6.20 6.20 5.78 6.20 6.20
e 4
1.2
Range 1.20 0.40 0.50 0.40 0.40 0.50 0.40
0

Samples
9 10 11 12 13 14 15 16 17 18 19 20
5.9 5.9 6.0 5.5
5.50 5.70 6.00 5.50 5.70 6.00 5.70 5.90
0 0 0 0
6.0 6.0 6.1 5.6
5.60 5.60 6.10 5.60 5.60 6.10 5.60 6.00
0 0 0 0
6.4 6.4 6.2 6.0
6.00 5.70 6.20 6.00 5.70 6.20 5.70 6.40
0 0 0 0
6.3 6.3 6.4 6.4
6.40 5.90 6.40 6.40 5.90 6.40 5.90 6.30
0 0 0 0
6.4 6.4 5.9 6.3
6.70 6.00 6.30 6.70 6.00 6.30 6.40 6.40
0 0 0 0
31. 31. 30. 29.
30.2 28.9 31.0 30.2 28.9 31.0 29.3 31.0
0 0 6 8
6.2 6.2 6.1 5.9
6.04 5.78 6.20 6.04 5.78 6.20 5.86 6.20
0 0 2 6
0.5 0.5 0.5 0.9
1.20 0.40 0.40 1.20 0.40 0.40 0.80 0.50
0 0 0 0

As the accepted norm within this industry is to take 3 hours (±0.5 hrs.) of measuring
acid value (A.V) & viscosity of 8mg KOH/g whereas our production process of
measuring acid value (A.V) & viscosity of 8mg KOH/g takes 5 to 7 hours.

Key Approaches

Control charts for variables:-

Monitor characteristics that can be measured and have a continuous scale, such as
height, weight, volume, or width. When an item is inspected, the variable being
monitored is measured and recorded. For example, if we were producing candles,
height might be an important variable, so we could take samples of candles and
measure their heights

X Bar Chart

Each sample has its own mean, x́ . The center line of the chart is then computed as
the mean of all k sample means, where k is the number of samples.

X Bar chart

A control chart used to monitor changes in the mean value of a process

Range (R) charts

Another type of control chart for variables. Whereas x-bar charts measure a shift in
the central tendency of the process, range charts monitor the dispersion or variability
of the process.

R Bar chart

A control chart that monitors changes in the dispersion or variability of a process

Reid & Sanders (2011,P.190 -194

Measuring Process Capability

Process capability is measured by the process capability index, Cp, which is computed
as the ratio of the specification width to the width of the process variability:
Process capability

The ability of a production process to meet

or exceed pre-set specifications.

Where the specification width is the difference between the upper specification limit
(USL) and the lower specification limit (LSL) of the process. The process width is
computed as 6 standard deviations (6s) of the process being monitored. The reason
standard deviations, which is a total of 6 standard deviations.

There are three possible ranges of values for Cp that also help us interpret its value:

There are three possible ranges of values for Cp that also help us interpret its value:

Cp. _ 1: A value of Cp equal to 1 means that the process variability just meets
specifications,

Cp. _ 1: A value of Cp below 1 means that the process variability is outside the range
of specification. This means that the process is not capable of producing within
specification and must be improved.

Cp. _ 1: A value of Cp above 1 means that the process variability is tighter than
specifications and the process exceeds minimal capability.

Reid & Sanders (2011,P.202 -204)

Findings & Justifications.

Evaluate 20 samples each with 5 observations taken by quality team .

We need to develop X bar chart and range (R) chart in order to monitor central
tendency of the process and volume dispersion in the measuring A.V & Viscosity
process. Use the above samples to develop control limits for the sample range.

x́ =121.02 /20 = 6.051

Ŕ = 12.70 / 20 = 0.635
 A 2 = 0.58 for n = 5 from Table 10.3

Upper Control Limit = 6.051 + 0.58 X 0.635 = 6.419

Lower Control Limit = 6.051 - 0.58 X 0.635 = 5.683

Sample 1 2 3 4 5 6 7 8 9 10
Range 1.20 0.40 0.50 0.40 1.20 0.40 0.50 0.40 1.2 0.40
 0
Sample 11 12 13 14 15 16 17 18 19 20
0.8
Range 0.50 0.40 1.20 0.40 0.50 0.40 0.50 0.90 0.50
0

X Bar chart control limit samples ranges are within these control limits.

D 3 = 0 for n = 5 from Table 10.3

D 4 = 2.11 for n = 5 from Table 10.3

Ŕ = 12.70 / 20 = 0.635

Upper Control Limit = 2.11 X 0.64 = 1.35 Minute

Lower Control Limit = 0 X 0.64 X = 0 Minute

R- chart control limit samples ranges are within these control limits

As no random variations are present now it is necessary to determine the process is

capable of start measuring acid value (A.V) & viscosity that is within an acceptable
range.

A critical aspect of statistical quality control is evaluating the ability of a production

process to meet or exceed preset specifications. This is called process capability.

As production process in the step for start measuring acid value (A.V) & viscosity
every hour till reaching an A.V value of 8mg takes 5 to 7 hours to reach acceptable
A.V. value. However, the accepted norm within this industry is to take 3 hours (±0.5
hrs.) and the standard deviation of the process is 0.274 hrs.

USL = 3 + 0.5 = 3.5 hours

LSL = 3 – 0.5 = 2.5 hours

6 σ = 6 * 0.274 = 1.644
 USL−LSL 3.5−2.5
Cp = = = 0.608
6σ 1.644

As per above calculation value of Cp is below 1 means that the process variability is
outside the range of specification. The process is not capable and must need to be
improved.

Suppliers

Key Issues

XYZ operations director claimed that they have regular problems coming from
suppliers; delays and mentioned that the relationship with the suppliers needs to be re-
evaluated with respect to their strategic importance.

XYZ also facing problem with the international supplies. It takes long lead times to
get their needs from international supplies. It takes around 60 days on average from
placing an order till having the order in hand.

XYZ purchase the bulk of the 4 million from international supplies out of which 90%
are coming from 2 main suppliers (divided equally between them).

XYZ start thinking to try out insourcing one material coming from one of the two
international suppliers (the additive from a German supplier). Thus, they collected
some primary data about the fixed and variable costs of each option as shown in the
following table:
 Outsource Insource

Fixed cost None 100,000

Variable cost $ 90/ton $ 15/ton

2. Key Approaches

EVALUATING ALTERNATIVES

XYZ needs to examine alternatives for future capacity from a number of different
perspectives. Most obvious are economic considerations: Will an alternative be
economically feasible? How much will it cost? How soon can we have it? What will
operating and maintenance costs be? What will its useful life be? Will it be
compatible with present personnel and present operations.

Insource

Processes or activities that are

completed in-house

Outsource

Processes or activities that are

completed by suppliers

Cost–Volume Analysis

Cost–volume analysis focuses on relationships between cost, revenue, and volume of

output. The purpose of cost–volume analysis is to estimate the income of an
organization under different operating conditions.

Stevenson (2012, P.199 - 200)

Indifference point

The quantity that would make two alternatives equivalent.

3.Findings & Justifications.

Below table showing to calculate to Demand of additive.

Calculation of material Requirement Out Source

Annual purchase from International Supplier 4,000,000

90% from two Suppliers 90%

Purchase from Two Suppliers 3,600,000

Equally Purchase from each Supplier (One
1,800,000
Supplier)
Purchase material at the rate $ 90 per ton 90

Total Requirement in ton 20,000

Prepare financial calculation to check the total cost involved in either producing
material insource or outsource the entire quantity from international supplier.

The total cost of insourcing the material is any fixed annual cost associated with
manufacturing plus a variable cost for each item bought during the year.

TC Insource = FC Insource+ (VC Insource * Q)

TC Outsource = FC Outsource + (VC Outsource * Q)
USD 400,000 = $100,000 + ( $15 x 20,000)
USD 1,800,000 = 0 + ( $90 x 20,000 )
First step for taking decision is to determine at what quantity the total cost of two
alternatives are equal. So we need to set the total annual cost of outsourcing equal to
total annual cost of insourcing.

Below is the calculation of the indifference point in order to know how many units we
must to buy or produce when total costs are equal.

FC Outsource + (VC Outsource x Q) = FC Insource + (VC Insource x Q)

0 + ( 90 x Q ) = 100,000 + (15 x Q)
100,000 = 75 Q
Indifference Point = 1,333 Ton
Since the costs are equal at 1,333 ton, XYZ should make the additive in-house rather
than buy from German supplier.

Total saving to make in-house is $1,400,000. Which is very high as we take the figure
mentioned in the case study.

Following are the advantages of insourcing of additive.

 Ability to oversee the entire process.

 Saving in lead time.

 Flexibility to meet the customer demand.

 High degree of control.

Since quality problem observed in plant beside the above advantages we need to focus
on the training of quality and production staff on quality parameters required to
produce material as per ISO 9000 standard.
Inventory

Key issues

XYZ company attempts to minimize the amount of inventory. There is a real need to
reassess this strategy for international purchases.

Currently XYZ is not calculating economic order measures and does not take the
following quantity discounts.

Quantity Slab Price

0 - 349 250

350 - 449 240

450 - 499 230

500 or more 220

The Marketing Director identified according to market surveys that customer are not
always happy with the selling price, compared to competitors.

Key Approaches

Economic order quantity model (EOQ)

An optimizing method used for determining order quantity and reorder points.

The EOQ formula tries to find that optimal point at which the total cost of both
ordering and carrying is minimized using the formula:
Economic order quantity model (EOQ)

An optimizing method used for determining order quantity and reorder points

The formula calculates the most economic inventory order and hence the number of
orders per year. The advantage of reduced stock holding is naturally a corresponding
reduction in storage facilities, complete with their associated costs for lighting,
heating, security, insurance and so on. However, the EOQ formula is only of real
benefit when the demand is constant, when demand fluctuates wildly perhaps due to
seasonal variation or fashion demands then this is of reduced value. Sophisticated
computer programs exist that perform a modified calculation more frequently to
adjust the EOQ for fluctuating demand projections.

Simon (2010,P.105)

Quantity Discount Model

The basic EOQ model assumes that no quantity discounts are available. In real life,
however, quantity discounts are often available, so we need to modify the basic model
for these situations. Quantity discounts are price incentives to encourage a company
to buy in larger quantities.

Reid & Sanders (2011,P.456)

Findings & Justifications.

As XYZ company is not calculating EOQ so we determining order quantity based on

total demand of about 3,000 tons/month i.e. 36,000 tons per annum. Ordering costs
are $120 per order, carrying costs are $4 per ton a month

EOQ =
√ 2 x 36,000 x 120
4 x 12
= 424.26 or 425
Quantity discount mode

Modifies the EOQ process to consider cases where quantity discounts are available

XYZ ignore quantity discount that offered on the soya bean oil; being a crucial
ingredient imported from an international supplier. In below table determine the
optimal order quantity and the total cost of soya bean oil need 36,000 tons annually
with different quantity slab.

Orderi Annual Total

Purchase Unit Holding
ng Material Annual
Quantity Price Cost
Cost Cost Cost
300 250 7,200 14,400 9,000,000 9,021,600
350 240 8,400 12,343 8,640,000 8,660,743
450 230 10,800 9,600 8,280,000 8,300,400
500 220 12,000 8,640 7,920,000 7,940,640
EOQ 425 240 10,200 10,165 8,640,000 8,660,365

As per above calculation soya bean oil should order 500 tons at a time since it will
save $ 719,725 per year (8,660,365 – 7,940,640).

The above saving will reduce the cost of manufacturing which can help to XYZ to
give quantity discount to the customers.

ORDER FULFILLMENT

Key issues

XYZ targets enhancing the company's delivery performance and minimizing finished
goods inventory.
XYZ received a lot of complaints from dealers regarding lost orders and the time
required to process these orders.

The Marketing Director identified according to market surveys that customer are not
happy with delivery terms and also referred to the continuous delivery delays to
customers.

The inventory manager and the marketing manager decided to perform an initial study
to the flow of customer orders, starting the arrival of the customer order till the
delivery of the order to the customer.

Key Approaches

Mapping business processes

XYZ can effectively manage and improve a business process, first understand and
developing graphical representations of process relationships and activities that make
up a business process.

Identifies the each activity that make-up the information, physical flows of a process.
It gives complete picture of how the process work

The Basic steps are:

Identify the focal point of the mapping effort.

The mapping effort should focus on the activities and flows that are associated with
the movement of the company through the process and identify clear boundaries,
starting and ending points.

3 Findings & Justifications

 Internal Mail
Below is the process mapping of customer orders, starting the arrival of the customer
Service
order till the delivery of the order to the customer

1 hour on average to deliver

mer Fax / Email Orders Paper order Orders sits In
created Box Order Sits in Order Processes
In Fax Picking area

Is Item in
Stock?
5
1 hour on Minutes
average
before
process
2 minutes 0.5% of oorders
YES

Customer received Transportation Division

Delivers Orders Inspector Checks
Order Worker Picks Order
Order

NO

Lost Sales
Delivery time 3 to 5

Days. Some orders after one

week. No history of lost or
incorrect deliveries

Process MAP of Initial Study shows that the average time between orders receiving to
inspector checking before given transportation division takes average 187 minutes
(3.11 hours) whereas Transportation division takes 3 to 5 days to deliver orders.

One potential improvement is to have customers place orders electronically, directly

to the picking area. This will cut down delays and number of lost orders. Further
needs to improve delivery time, which takes 3 to 5 days even one week for some
customers.
It is clear that the order-filling process is hampered by unnecessary delays including
long delivery time & orders Lost.

OVERALL CONCLUSION

Purpose and Limiting Conditions

The purpose of engagement is to assist improvement of forecasting accuracy,

minimizing waste, developing supplier relations, etc. In the capacity of ‘Operation
Management Consultant’.

This report is prepared based on the information given in case study. Accordingly our
findings are exclusively on the data and information provide to us. We relied upon the
data and information mentioned in case study.

Financial Results and Interpretations

Forecasting

XYZ is using three month moving average forecast usually moving average method
avoiding responding to random variations.

Company volume is growing approximately 19% from year 2013 to 2014 whereas in
year 2015 1st quarter volume growth is 17% and gradually drop to -2% in 2nd quarter
and July & August volume drop by 7.3% & 4.8% respectively. As forecast is based on
past actual sales which is lower than last year so every month forecast is also
gradually going to down.

Company need to take following corrective action in order to achieve 4th quarter
growth of year 2015.

 Prepare forecast for the month of September to December 2015 with

minimum growth of 15%.

 Additionally we need to consider some judgemental and qualitative factors

related to sales issues.
  Start some sales campaign by given quantity discount.

 Announce attractive incentive policy for the achievers.

 Improve delivery time by reducing the order lost and customers place
orders electronically, directly to the picking area

Company need to develop forecast for the year 2016 considering that company also
want to increase its market share in the local market as well as expanding
internationally (in Africa) in the upcoming years. Currently XYZ utilizing its capacity
only 60% to 65% so need to increase the capacity utilization in coming years. We
propose a forecast for the year 2016 attached in annexure – A with minimum growth
of 21% considering to maintained quarter growth. Additionally company approaching
the market in Africa. They need to consider the following questions.

Which countries are supplying Alkyd Resins to Africa?

What is the dollar value of these imports?

How much do the imports of Alkyd Resins vary from one country to another in
Africa?

Do exporters serving the market in Africa have similar market shares across the
importing countries?

On the supply side, Africa also sells to the international market of Alkyd Resins.
What is the value of these exports and which countries are the largest buyers?

Minimizing waste and overall cost

The company is operating under a strategy that aims to minimize the overall cost of
operation in production process company need to change the process of measuring
acid value and viscosity after cooling the mixture and validate heating and cooling
reactor which will save 6- 7 hours in total manufacturing cycle time.

We need reduce manufacturing cycle time to one shift with some extended over time
instead of two complete shifts.

Once we reduce production process time than XYZ company utilize second shift to
start second batch in order to meet market demand.

As quality problem observed and company providing only on Job training to their
staff. We need to focus and implement the following training on quality.

Total quality management (TQM)

A philosophy that involves everyone in an organization in a continual effort to

improve quality and achieve customer satisfaction.

Six sigma

A business process for improving quality, reducing costs, and increasing customer
satisfaction.

Supplier quality.

Suppliers must be included in quality assurance and quality improvement efforts so

that their processes are capable of delivering quality parts and materials in a timely
manner. It will save lot of money, thereby reducing or eliminating defect. We also
propose to produce additive in-house expected saving is around USD 1.4 million.
Company also need to avail quantity discount approximately 720 k. All above savings
will enable to company reduce the cost and enable to invest some marketing activities
to enhance company market share.
 ANNEXURE

Actual analysis by monthly and quarterly contributions

Forecast for the year 2016

Mon Mon Mont Qt

Mont Gro Gro Gr
Actu thly Qtr Actua Qtr Act / thly Qtr Forec hly r
hly wth wth wt
Month al Cont Co l Co FC Cont Con ast Contr C
Contri Over Over Ov
2013 ribut nt. 2014 nt. 2015 ribut t. 2016 ibutio on
bution LY LY LY
ion ion n t.
6,00 7,60 8,90 17.1 10,23
Jan 7% 8% 27% 8% 8% 15
0 0 0 % 5
6,20 22 7,70 24 9,00 26 16.9 10,35 24
Feb 7% 8% 24% 9% 8% 15
0 % 0 % 0 % % 0 %
6,40 7,90 9,20 16.5 10,58
Mar 8% 8% 23% 9% 8% 15
0 0 0 % 0
6,50 8,00 8,00 0.0 10,00
Apr 8% 8% 23% 8% 8% 25
0 0 0 % 0
6,70 8,00 8,00 0.0 10,00
May 8% 24 8% 25 19% 8% 22 8% 23 25
0 0 0 % 0
% % % - %
6,80 8,10 7,60
Jun 8% 8% 19% 7% 6.2 9,500 7% 25
0 0 0
%
-
7,00 8,20 7,60
Jul 8% 8% 17% 7% 7.3 9,500 7% 25
0 0 0
%
26 25 24 - 25
7,20 8,30 7,90
Aug 9% % 8% % 15% 7% % 4.8 9,875 8% % 25
0 0 0
%
7,30 8,50 9,77 15.0 12,21
Sep 9% 9% 16% 9% 10% 25
0 0 5 % 9
7,50 8,60 9,89 15.0 11,86
Oct 9% 9% 15% 9% 9% 20
0 0 0 % 8
7,50 27 8,60 26 9,89 28 15.0 11,86 28
Nov 9% 9% 15% 9% 9% 20
0 % 0 % 0 % % 8 %
7,60 8,80 10,1 15.0 12,14
Dec 9% 9% 16% 10% 9% 20
0 0 20 % 4
Total 82,7 98,3 105, 7.7 128,1
19% 21%
Tons 00 00 875 % 39
Averag 6,89 8,19 8,82 10,67
0 0
e 2 2 3 8
Capaci
ty
41% 49% 53% 64%
Utiliza
tion

References

Bozarth and Handfield, (2013) Introduction to Operations and Supply Chain

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Herrman, J. w., 2008. Improving Production Scheduling: Integrating Organizational,.

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kumar, A. & Suresh, N., 1996. Operation Management. Basic concepts of procession,
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R. Dan Reid & Nada R. Sanders, (2011) Statistical Quality Control: Process
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