Case Study: Demand Forecast, Inventory Management and Capacity design at Pharma.Tech
Pharma.Tech is a company specialized in manufacturing and selling paramedical equipment varying from needles to medical uniforms worn by medical or laboratory staff. Currently and under the effect of the coronavirus outbreak, the company is planning to adjust its annual production of medical face masks to the drastically changed market demand. While the World Health Organization is recommending everyone to wear medical-grade masks in public, such masks are difficult and expensive to make. Therefore, the company should accurately predict the total market demand of these type of masks. Moreover, the prices for such items are highly regulated and knowing that the storage cost of the medical face masks is about 60 to 80% from their total cost, the company should manage its inventory while keeping its total inventory cost at minimum. As the operations manager of Parma.Tech you are responsible for providing a plan to accurately forecast the future demand of medical face masks, then manage optimally the company stock level and propose direction regarding the company capacity design in order to improve its productivity.
Part I: Demand Forecast
As the company operations manager, you want to be certain that enough drivers and vehicles are available to deliver orders promptly and that they have adequate inventory of face masks in stock. Therefore, you want to be able to forecast the demand for deliveries during the next period (period 15). From the records of previous orders, management has accumulated demand data for the past 14 years.
Compute the demand forecast for period 15 using the Simple Moving Average of order 1, 3, and then 5.
Compute the demand forecast for period 15 using the weighed moving average of order 3 (the weights are 0.5, 0.3, and 0.2 from most recent period).
Compute the demand forecast for period 15 using the exponential smoothing with α = 0.3 and F1 = 2000 Masks.
From the data in your table and your knowledge regarding the pandemic situation that affected the world, can you guess which forecasting method is the most reliable? Justify your guess.
Using the MAD Criterion, which forecasting method is the most accurate.
Part II: Inventory Management
In the following, you need to manage the stock level of the company with respect to some costs that your team already estimated. The team report states that for one order made, the company should pay 20 AED as clerical costs and 30 AED as packing costs. It is stated also that the company spends 10 AED to produce one mask and that 80% of that corresponds to the cost of keeping one mask in stock for one year. With this information at hand you will manage to meet the annual demand for year 2021 and which corresponds to the demand forecast for period 15 (with the most accurate method in part I)
If the order quantity is 20% of the annual demand, Determine the ordering, holding, and total inventory costs for that order quantity.
If the order quantity is 50% of the annual demand, Determine the ordering, holding, and total inventory costs for that order quantity.
Can you tell if the order quantity, used in the previous question, is the optimal order quantity or not (that minimize the total inventory cost)? Explain why.
Using the EOQ model, Determine the optimal order quantity.
How many orders will be placed per year using the optimal order quantity.
Determine the ordering, holding, and total inventory costs for the optimal order quantity.
Part III: Capacity Design
Pharma.Tech is planning to expand its production capacity, to meet the growing demands of 2021 and later, by opening a new plant to produce its high selling products (the medical face masks) by using mass production processes for the mass market. The manufacturing team is discussing the potential layout options for the new factory. As the advisor for the company, answer the following questions.
Which layout type is most suitable for the new factory? Justify your choice.
Discuss the advantages and disadvantages of your proposed layout compared to another alternative layout type in terms of demand volume, flexibility, labor skill, and equipment requirement.