October 21, 2007

Operations Management Lesson 7 Exercise

Create a new entry in your Blog using the subject ‘Operations Management Lesson 7 Exercise’.
Take a look at a material processing operation. What types of stock control methodologies (re-order point, MRP, ERP etc.) are used? Comment on the possible reasons for the choice of method. If you can, conduct a sample Pareto (80/20) analysis of stock levels and stock usage (by value). How effective is the stock management?

I’ve chosen the material processing operation of VIP Garden, a shop of orchids, sited in Rome.

This shop works a high quantity of orchids and accessories related to the orchids' world, the decision about the products and especially the quantities of orchids to keep in stock (within the greenhouse) is taken by the principal (the owner of the shop) and it is based on the popularity of orchids and of the level of stock.

2 years ago they have bought a software that supports them in the management of the warehouse by linking the stock to sales. Before the arrival of this software, the system they used was the re-ordering point (ROP) system.

They identified in advance two factors:
1) the minimum number of orchids to acquire (relatively to the price of orchids and the cost of management)
2) the minimum value (re-order point) at which they had to do the new order, for not remain without orchids (normally their supplier takes from 4 to 5 days to supply)

blog lesson7 img2(grafico)

So, when the ROP is achieved they entered a new order.

Now with the new SW they’ve moved from ROP to MRP; they have added additional information:
• the seasonality, p.es the increased number of marriages, in Rome corresponds to the months of May-June and September-October, (they are called for setting up weddings flower ornament).
• the rankings of orchids more sold
• the price at which were sold
•The maximum capacity of the warehouse (previously was happened, that once bedridden from low-price, unknowingly they bought more orchids that the greenhouse could contain)

The SW indicates the levels of stocks, the different influence factors, when and the quantity to be acquired by running an alarm, which is analysed by the principal and normally turned in order to the supplier.

For simplicity of management, method MRP has been applied only to the low price orchids, while for the high price (rare) orchid and the accessories, the principal is still continuing to use the ROP method.

Let’s apply the Pareto Analysis; we can divide the items in:

  • A. High value items: 15- 20% of items that account for 75-80% of the total annual inventory value (low price orchid).
  • B. Medium value items: are 30 -40% of the items that account for approximately 20% of the total annual inventory value (high price rare orchid, for which they cannot predict forecast).
  • C. Low value items: are 40-50% of the total number of items and account for 10-15% of the annual inventory value (garden accessories).

blog lesson7 img3

It is plain that the VIP Garden decided to use both methods: MRP, as we saw, was used to calculate demand for high value items (low cost orchids), while they continue to use ROP for the high cost orchid and the garden accessories.

The fundamental factor with the implementation of the new SW is that they have discovered that the profitability of glass vessels linked to the selling of orchids is very high, especially if tailored; in fact now they normally sell the combination of orchids and glass vase (doubling the price of sale).

Furthermore as there is a huge request of orchids for weddings they have implemented an Excel spreadsheet (MRP order record sheet), where mark all the waiting period and processing of the various components for the creation of floral compositions. In order to have the perfect delivery time.

These components are:
glass vases (7 days of dispatch, in packs of 10)
Plastic vessels (2 days of dispatch, in packs of 20)
bark for orchids (4 days, in packs of 20 sacks)

to prepare a beautiful composition they take 20 to 40 minutes.

blog lesson7 img3(orchidea in vaso

Zoe Radnor (2007); «Operation Management »;Warwick Business school

N. Slack, S. Chsmbers, R. Johnston, A. Betts; «Operation and Process Management »; Prentice Hall

- 2 comments by 1 or more people Not publicly viewable

  1. I liked your example.

    However, I also see some possible misunderstandings.

    Type ‘A’ items are those that are of high value, eg the expensive orchid. These are the vital few expensive items.

    Also MRP applies to the demand of things whos demand DEPENDS ON THE DEMAND FOR SOMETHING else.

    So, car wheels are an example. I know I need 4 for each car I build, so I only need to decide how many cars – I should not have too many or too few wheels for the cars under construction!

    Perhaps your orchid shop does use a type of MRP system – but please double check this point.

    26 Oct 2007, 15:37

  2. Type A is normal orchid that represent close to the 80% of the total annual inventory,
    while Type B is the very expensive orchid, for this kind of orchid they are not able to predict forecast, so they continue to use ROP
    (when they’ve finished the first 20 and they remain with just 5or which they continue to use ROP they make the new order).

    All the accessories that they sale are all concerning the world of orchid, but not conditioning for the sale of orchid.
    for example fertilizing, shear, bark; you can sale an orchid without them and vice versa.

    In the last example you are right they have to wait the arrive of glass vases if they want to sale them jointly.

    27 Oct 2007, 17:57

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