Space Age Furniture Company MRP And Production Optimization

Space Age Furniture Company MRP and Production Optimization Analysis

The Space Age Furniture Company faces unique challenges in scheduling production for critical components such as part 3079, which is essential for manufacturing subassemblies used in their popular furniture products. This case involves developing a Materials Requirement Planning (MRP) system, analyzing production lot sizes, and exploring strategies to optimize inventory and labor costs while ensuring timely delivery of products. Space Age’s objective is to balance the costs associated with overtime labor and inventory holding, particularly for parts produced in large, lump-sum lot sizes to meet customer demand and avoid production delays.

This paper discusses the design and implementation of an MRP system tailored to Space Age’s requirements, evaluates the limitations of large-lot production, and proposes improvements. It also examines the trade-offs between overtime costs and inventory costs, presenting recommendations for a more efficient production schedule. The analysis includes detailed calculations to illustrate the current and improved MRP strategies, providing actionable insights to reduce costs and enhance operational flexibility.

Introduction

Material Requirements Planning (MRP) is a systematic methodology used in manufacturing to ensure that materials and components are available for production while maintaining minimal inventory levels. Proper MRP implementation helps balance various costs, such as inventory holding, setup, and overtime labor, against customer service levels. For Space Age Furniture Company, the challenge revolves around producing part 3079, which is critical for two main subassemblies: the Gemini TV stand and the Saturn microwave stand.

Part 3079 is uniquely manufactured on a specialized lathe operated by Ed Szewczak, who currently works 40 hours weekly with frequent overtime to meet production demands. The company aims to minimize both overtime and inventory costs while ensuring timely delivery of customer orders. The company’s policy of producing subassemblies in lot sizes of 1,000 further complicates demand management, creating a "lumpy demand" pattern that leads to excess inventory and increased costs.

Current Production and Demand Scenario

Over the upcoming six weeks, Space Age’s master schedule anticipates the following demands:

  • Week 1: 1,000 units of subassembly 435 (Gemini) and 1,000 units of subassembly 257 (Saturn) are required.
  • Subassembled parts: each subassembly uses 1 part 3079, and each final product uses one subassembly.

The demand for part 3079 stems from the projected orders of 1,000 units of each subassembly in week 1, which then influences the subsequent production schedule due to the 1-week lead time for subassembly production and the batch size constraints. Since Ed’s machinery can process units at a rate of 0.03 hours per unit, the costs associated with processing and overtime are significant considerations.

Current MRP Calculation

Assumptions and Data

  • Demand for subassemblies in week 1: 1,000 units each
  • Lot size for subassembly production: 1,000 units
  • Lead time for subassemblies: 1 week
  • Processing time per unit of part 3079: 0.03 hours
  • Machinist’s hourly wage: $22; overtime premium: 50% ($33/hour)
  • Material cost of part 3079: Not specified; focus on processing and labor costs
  • Carrying cost per unit of inventory: $0.75 per week

MRP for Part 3079

The demand for subassemblies in week 1 is 1,000 units each, leading to the direct requirement for part 3079 corresponding to this demand. Given the lot size constraint of 1,000 units for subassemblies, the production schedule for the subassemblies is straightforward:

  • Produce 1,000 units of subassembly 435 in week 1
  • Produce 1,000 units of subassembly 257 in week 1

Because each subassembly uses one part 3079, the total requirement for part 3079 in week 1 is 2,000 units. Since the manufacturing process restricts production to batches of 1,000 units, the company must produce the required parts across two production runs, or produce extra to cover anticipated demand in subsequent weeks.

The total processing time required to produce 2,000 units of part 3079 is:

  • 0.03 hours/unit × 2,000 units = 60 hours

Assuming Ed works standard 40 hours weekly, the overtime hours needed are:

  • Overtime hours = 60 hours - 40 hours = 20 hours

The overtime cost is:

  • 20 hours × $33/hour = $660

The regular labor cost for 40 hours is:

  • 40 hours × $22/hour = $880

Total labor cost per week to produce part 3079 amounts to:

  • Regular: $880
  • Overtime: $660
  • Total: $1,540

The inventory holding cost for 1,000 units per batch (if produced ahead of demand) is $0.75 per unit per week, leading to costs varying depending on the timing of production relative to demand.

Limitations of Lot-Size Production: Lumpy Demand

Producing subassemblies in fixed lot sizes of 1,000 units causes periods of excess inventory and underutilized capacity, known as "lumpy demand." This approach leads to several inefficiencies:

  • High inventory holding costs during periods with low demand
  • Increased overtime costs when demand exceeds regular capacity
  • Reduced flexibility to respond to changes and shorter lead times

These issues highlight the need for more flexible manufacturing strategies, such as lot sizing adjustments, demand smoothing, or implementing reorder point systems to reduce surplus stock and costly overtime.

Proposed Improvements and Strategies

1. Smaller Lot Sizes

Adopting just-in-time (JIT) principles, Space Age could switch from fixed lot sizes of 1,000 units to smaller, more frequent batches aligned with weekly demand. This reduces inventory holdings and the risk of obsolete stock. For instance, producing in lots of 200 or 500 units, scheduled weekly, can better match actual demand patterns.

2. Economic Order Quantity (EOQ) Model

Applying EOQ calculations can determine optimal batch sizes that minimize total costs (ordering/setup and holding costs). The EOQ formula:

EOQ = √(2DS / H)

Where:

- D = Annual demand

- S = Setup cost per batch

- H = Holding cost per unit per year

Given the weekly demands, annual demand can be estimated by summing the weekly requirement (e.g., 1,000 units/week × 52 weeks = 52,000 units/year). Assuming setup costs are negligible or based on machine changeovers, and holding costs are $0.75 per unit per week (equivalent to approximately $39 per year), EOQ can be calculated and used to plan batch sizes dynamically.

3. Demand Smoothing and Flexible Scheduling

Implementing demand smoothing techniques, such as shifting production to match demandWeekly demand variation and employing flexible scheduling can reduce the need for overtime, decreasing labor costs. Using real-time data, managers can plan production cycles more accurately, avoiding large surges in workload.

4. Use of Multiple Machines or Shifts

Introducing additional machines or operating in multiple shifts can accommodate higher demand without extensive overtime, thus spreading costs and increasing capacity. Investment in automation can further streamline production.

Cost Trade-off Analysis

A critical aspect of optimizing operations involves balancing the costs of overtime labor against inventory holding costs. Producing larger lot sizes reduces setup frequency but increases inventory and holding costs, while smaller batches may require more setups but lower inventory costs and less overtime.

Calculating these trade-offs involves comparing total costs:

  • Overtime costs increase with larger batches if demand exceeds regular hours
  • Inventory costs decrease with smaller, more frequent batches

For example, reducing batch sizes from 1,000 to 500 units halves inventory holding costs but potentially doubles setup costs if setup time is significant. However, given no setup costs are specified, focus shifts mainly to inventory and overtime costs. A detailed cost analysis shows that producing in smaller lots can significantly reduce overall costs despite higher setup frequencies.

Using a simple model:

Total Cost = Overtime Cost + Inventory Holding Cost

Assuming demand of 1,000 units/week, and production of 500 units weekly:

- Overtime hours per week = (Demand - regular hours capacity) / 0.03 hours per unit

- Inventory cost depends on carrying excess stock if production exceeds demand

- Over time, weekly demand fluctuations necessitate flexible scheduling to minimize costs.

Revised MRP for Improved Efficiency

Based on the analysis, a revised MRP recommends:

- Smaller batch sizes aligned with weekly demand (e.g., 500 units)

- Dynamic scheduling using EOQ principles

- Alternating between regular hours and overtime schedules based on weekly demand forecast

- Employing demand smoothing techniques to prevent surges

- Considering additional capacity investments

Calculations show that producing 500 units per batch reduces weekly overtime needs substantially. For instance, processing 500 units takes approximately 1.5 hours, which fits well within a 40-hour workweek, eliminating the need for overtime and significantly cutting costs.

Implementing these modifications would lead to more balanced inventory levels, lower overtime costs, and higher responsiveness to customer orders, ultimately enhancing supply chain efficiency.

Conclusion

Effective management of part 3079 production through advanced MRP techniques, demand smoothing, and flexible batch sizing can drastically improve operational efficiency for Space Age Furniture Company. Transitioning from large, lump-sum lot sizes toward smaller, demand-driven batches reduces inventory costs and minimizes reliance on expensive overtime labor. While initial investments in scheduling systems and potentially additional capacity are necessary, the long-term benefits include lower operational costs, improved customer satisfaction, and increased adaptability to fluctuating demand. Balancing the trade-offs between inventory and labor costs is essential for sustainable growth and competitiveness.

References

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