Inventory Management

PROBLEM 1:

AutoAmerica is an American leader in the automotive field. Its mission is to shape the future of mobility. This company, located in OHIO, is continually seeking to deploy innovative programs to ensure its sustainability. Its new program, the CokCar and the assembly line specially designed for the manufacture of this model of cars is a good example. However, production of CokCar brings many management challenges given the magnitude of such a project.

The LSX-F213 part is an important component of CokCar. This component ensures high resistance of the attached aluminum plates to form the outer skin of the car engine. Each car contains 243 LSX-F213 parts. Currently, LSX-F213 parts are manufactured in-house with sophisticated machines made by a highly skilled workforce. The production department has determined, based on the company's order books, that it will produce 100 CokCar during the year 2017. The Director of Operations, Mrs. Luce, wants to determine what inventory management policy should be implemented for the LSX-F213 in 2017 to minimize costs. Mrs. Luce has collected the necessary data com piled in Table 1.1.

Table 1.1: Data collected on inventory management costs

For the LSX-F213 parts.

Annual storage cost (per unit)	50	$/LSX-F213/year
Startup cost	350	$/startup
Average usage rate	90	LSX-F213/day
Average production rate (capacity)	380	LSX-F213/day
Component production cost (raw material + labor + overhead)	16.50	$/LSX-F213

Question 1.1

What is the economic quantity to start and what is the total annual cost of inventory (storage, startup, component production cost (raw material + labor + overhead)) for the year 2017? Show your calculations clearly.

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Question 1.2

In the automotive industry, as in other industries, there is a trend towards specialization and relocation of production, so that companies buy more complex parts from their partners. Mrs. Luce therefore analyzing the possibility of outsourcing the production of the LSX-F213 parts. To ally with the new market trends, she spotted a certified subcontractor with which AutoAmerica already does business, which could make the part in question. This supplier would provide the LSX-F213 parts at different prices depending on the ordered quantity. The offer of the subcontractor is compiled in Table 1.2. In this case, Mrs. Luce estimated the annual storage cost for $30/part and the cost of placing an order for $71.

Table 1.2: Data on the supplier's offer.

LSX-F213 Ordred Quantity	Unit Price ($)
0 to 199	19
200 to 399	18
More than 400	17

Considering the different prices offered by the subcontractor, what is the optimal order quantity to minimize the total costs incurred by AutoAmerica? What would be the total cost of inventory management (storage, order and purchase)?

Show the details of your approach, the calculations that led to the choice of the optimal quantity.

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Question 1.3

Based solely on costs, should AutoAmerica outsource or continue to produce the LSX-F213 part? Justify your assertion by leaning on savings or increased costs caused by outsourcing.

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Question 1.4

Apart from the quantitative factors, other qualitative criteria should also be considered by AutoAmerica on the decision of outsourcing the LSX-F213 parts. In this perspective, present two disadvantages of outsourcing compared to assembling internally. Justify your answers by explaining the impact on AutoAmerica operations.

Disadvantage 1 of outsourcing versus in-house production:

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Disadvantage 2 of outsourcing versus in-house production:

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