SMC International

Global Case Study #646747

Presented By:
Phanthira Rojwattanasiri - Thammasat University
Varrick Chambers - Auburn University
Cassy Smart - University of North Texas
Jonathan Seal - University of North Texas

April 17, 2015

2

SMC International Global Case Study #646747

Case Summary

Case Summary
Number of Units per Case

15.00

Cost to Place an Order ()

48.00

Inventory Carrying Cost ()

0.32

Unit Price ()
Annual Demand (Units)

112.00
73,646.00

SMC International Global Case Study #646747

Rounded

Part A

Total Annual Cost of Ferguson's Proposal

Order Quantity (Units)

90.00

90.00

Number of Units per Case

6.00

6.00

818.29

819.00

Annual Ordering Cost

39,277.87

39,312.00

Annual ICC

1,612.80

1,612.80

Annual Total Cost ()

40,890.67

40,924.80

Part B

Orders Per Year

Q#1: What is the total annual cost of Ferguson's proposal?

SMC International Global Case Study #646747

Rounded

Part B

Part A

Total Annual Cost of Patrachalski's Proposal

Order Quantity (Units)

270.00

270.00

Number of Units per Case

18.00

18.00

Orders Per Year

272.76

273.00

Annual Ordering Cost

13,092.62

13,104.00

Annual ICC

4,838.40

4,838.40

Annual Total Cost ()

17,931.02

17,942.40

Q#2: What is the total annual cost of Patrachalski's proposal?

SMC International Global Case Study #646747

Rounded

Part B

Part A

The Lowest Total Annual Cost

Order Quantity (Units) = EOQ or Q*

444.15

445.00

Number of Units per Case

29.61

29.67

Orders Per Year

165.81

166.00

Annual Ordering Cost

7,959.10

7,968.00

Annual ICC

7,959.10

7,974.40

Annual Total Cost ()

15,918.21

15,942.40

Q#3: Based on the lowest total annual cost, what order quantity (in units) should Martin recommend?
Q#4: What is the total annual cost of Martins recommendation?
6

Part B

Part A

SMC International Global Case Study #646747

Total Annual Cost - the Order Quantity is Decreased to the Nearest Whole Case

Rounded

Order Quantity (Units)

435.0000

435.0000

Number of Units per Case

29.0000

29.0000

Orders Per Year

169.3011

170.0000

Annual Ordering Cost

8,126.4552

8,160.0000

Annual ICC

7,795.2000

7,795.2000

Annual Total Cost ()

15,921.6552

15,955.2000

0.0217%

0.0803%

Percent Total Annual Cost Change

Q#5: Let's explore the concept of "robustness." Lewins proposal to use Economic Order Quantity may be unrealistic
since SMC would like to place orders in whole cases. If the order quantity is decreased to the nearest whole case what
percent would your total annual cost change?

Part B

Part A

SMC International Global Case Study #646747

Total Annual Cost - the Order Quantity is Increased to the Nearest Whole Case

Rounded

Order Quantity (Units)

435.0000

450.0000

Number of Units per Case

30.0000

30.0000

Orders Per Year

163.6578

164.0000

Annual Ordering Cost

7,855.5733

7,872.0000

Annual ICC

8,064.0000

8,064.0000

Annual Total Cost ()

15,919.5733

15,936.0000

0.0086%

-0.0401%

Percent Total Annual Cost Change

Q#6: What percent would your annual total cost change if the order quantity is increased to the nearest whole case?
8

SMC International Global Case Study #646747

Part A

The Lowest Total Annual Cost

Old

Change

New

EOQ

444.146453

-9.50%

401.952540

Rounded EOQ

445.000000

-9.50%

402.725000

73,646.000000

9.60%

80,716.016000

Cost to Place an Order ()

48.000000

-25.271442%

35.869708

Rounded Cost to Place an Order

48.000000

-24.983943%

36.007707

Part B

Sales (Demand)

Q#7: What would the cost to place an order need to be for Davis to meet his inventory reduction
objective if only Vice President of Sales Steve Smith achieves his goal to increase sales by 9.6%

SMC International Global Case Study #646747

Part A

The Lowest Total Annual Cost

Old

Change

New

EOQ

444.146453

-9.50%

401.952540

Rounded EOQ

445.000000

-9.50%

402.725000

73,646.000000

9.60%

80,716.016000

Inventory Carrying Cost

0.320000

-0.026

0.294000

Cost to Place an Order ()

48.000000

31.343137%

32.955294

Rounded Cost to Place an Order

48.000000

31.078998%

33.082081

Part B

Sales (Demand)

Q#8: What would the cost to place an order need to be for Davis to meet his inventory reduction
objective if Vice President of Sales Steve Smith achieves his goal to increase sales by 9.6% AND
Financial Comptroller Fred Ferguson achieves his goal of reducing the cost to carry inventory from
32.0% to 29.4%. Your answer must be accurate to 6 decimal places

10

SMC International Global Case Study #646747

Part A

The Lowest Total Annual Cost

Old

Change

New

EOQ

444.146453

-9.50%

401.952540

Rounded EOQ

445.000000

-9.50%

402.725000

73,646.000000

9.60%

80,716.016000

0.320000

-0.026

0.294000

Unit Price ()

112.000000

-5.20%

106.176000

Cost to Place an Order ()

48.000000

34.913294%

31.241619

Rounded Cost to Place an Order

48.000000

34.662890%

31.361813

Sales (Demand)
Part B

Inventory Carrying Cost

Q#9: What would the cost to place an order need to be for Davis to meet his inventory reduction objective if Vice President of Sales Steve Smith achieves his
goal to increase sales by 9.6% AND Financial Comptroller Fred Ferguson achieves his goal of reducing the cost to carry inventory from 32.0% to 29.4% AND
Purchasing Director Peter Patrachalski achieves his goal of reducing the average cost per unit by 5.2%

11

SMC International Global Case Study #646747

Part A

The Lowest Total Annual Cost

Old

Change

New

EOQ

444.146453

JIT

1.000000

Rounded EOQ

445.000000

JIT

1.000000

73,646.000000

9.60%

80,716.016000

Cost to Place an Order ()

48.000000

99.999537%

0.000222

Rounded Cost to Place an Order

48.000000

99.999537%

0.000222

Part B

Sales (Demand)

10

Q#10: What would the cost to place an order need to be if Davis implemented a Just-In-Time
approach so ordering 1 unit at a time is the optimal ordering quantity? Use the original variables for
the part number. Your answer must be accurate to 6 decimal places (e.g.47.123456)

12

Part B

Part A

SMC International Global Case Study #646747

11 - Four viable recommendations which would

result in a lower COST TO PLACE AN ORDER
Implement an EDI System
Implement a VMI System
Implement Assumed Receipts
Implement Supply-Chain Technology

13

SMC International Global Case Study #646747

Part B

Part A

11: Implement an EDI System

EDI Benefits: (1)
Lowers costs by at least 35%
Cost to Place an Order decreased from 48 to 31.20
Improves data quality, delivering at least a 30% - 40% reduction
in transactions with errors
Speeds up business cycles by 61%
Enhanced trading Partner Relationships
Implementation Cost: (2)
In-house model: about 77,000
Hosted model: about 2,800 and about 70 per month
-----------------------------Sources:

(1) The Benefits of EDI. (2013). A GXS White Paper.

Available at: http://www.gxs.com/wp-content/uploads/wp_benefits_edi_gxs.pdf
(2) Simmons, J. (2007). ERP / EDI Integration Methodologies - In-House versus Hosted.
Available at: http://www.dicentral.com/downloads/EDI%20Integration%20Methods%20White%20Paper.pdf

14

SMC International Global Case Study #646747

Part B

Part A

11: Implement an EDI System

The Total Annual Cost (New Order Cost)
Order Quantity (Units)

444.146453

Number of Units per Case

29.609764

Orders Per Year

165.814676

Annual Ordering Cost

5,173.417881

Annual ICC

7,959.104432

NEW Annual Total Cost ()

13,132.522313

% Change

OLD Annual Ordering Cost

7,959.104432

OLD Annual Total Cost ()

15,918.208864

17.500000%

15

SMC International Global Case Study #646747

Part B

Part A

11: Implement an EDI System

The NEW Lowest Total Annual Cost (Changing Q*)
Order Quantity (Units) = EOQ or Q*

358.082318

Number of Units per Case

13.711186

Orders Per Year

205.667793

Annual Ordering Cost

6,416.835138

Annual ICC

6,416.835138

NEW Annual Total Cost ()

% Change

12,833.670275

OLD Annual Ordering Cost

7,959.104432

OLD Annual Total Cost ()

15,918.208864

19.377423%

16

SMC International Global Case Study #646747

Part B

Part A

11: Implement a VMI System

VMI Benefits:
By implementing VMI systems, SMC will be able to manage the inventory of its product
(and possibly related products) at the retailers warehouse(s) and reorder as appropriate for
consumer fulfillment.
Although the supplier takes on the responsibility for replenishment in a VMI relationship,
the savings in operating costs alone can easily offset the costs of doing VMI.
Reduced Operating Costs Include:
Fewer order problems caused by bad data
Fewer emergency orders due to poor customer habits
Fewer orders overall. A more consistent order process where the supplier regularly
evaluates the complete requirements for its customer typically lowers total order
count by 4-6%. Fewer orders results in downstream savings in warehouse pick time,
transportation scheduling, accounts receivable, and invoice reconciliation.
-----------------------------Source: Coyle, J., Langley Jr., C., Novac, R., & Gibson, B. (2012). Supply Chain TechnologyManaging Information Flows.
In Supply Chain Management: A Logistics Perspective (9e [ed.]. ed., pp. 202-203). Mason, OH: South-Western Cengage Learning.

17

SMC International Global Case Study #646747

Part B

Part A

11: Implement a VMI System

The Total Annual Cost (New Order Cost)
Order Quantity (Units)

444.146453

Number of Units per Case

29.609764

Orders Per Year

165.814676

Annual Ordering Cost (4%-6%)

Annual ICC
NEW Annual Total Cost ()
(4%-6%)
% Change

3,183.64 - 4,775.46

OLD Annual Ordering Cost

7,959.104432

OLD Annual Total Cost ()

15,918.208864

7,959.104432
11142.744432 12734.564432
30.000011 - 20.000017 %
18

SMC International Global Case Study #646747

Part A

11: Implement Assumed Receipts

Part B

Labor represents 10% of the total cost

associated with receiving orders
Receiving is the variable overhead
in order cost
Reducing inspection and eliminating
counting of received orders decreases
labor costs associated with receipt to
almost zero
The EOQ model is a fixed order
quantity model which lends itself well
to an Assumed Receipt process

-----------------------------Source: EXTREME LEAN MANUFACTURING. (n.d.). Retrieved April 18, 2015,

from http://www.technicalchange.com/extreme-lean.html

Cost of Goods Sold

19

SMC International Global Case Study #646747

Part B

Part A

11: Implement Assumed Receipts

The Total Annual Cost (New Order Cost)
Order Quantity (Units)

444.146453

Number of Units per Case

29.609764

Orders Per Year

165.814676

Annual Ordering Cost

7,401.967122

Annual ICC

7,959.104432

NEW Annual Total Cost ()

15361.071554

% Change

Labor cost

- 3.360000

Order cost w/ reduced Labor

44.640000

OLD Annual Ordering Cost

7,959.104432

OLD Annual Total Cost ()

15,918.208864

3.50000%

20

SMC International Global Case Study #646747

Part B

Part A

11: Implement Supply-Chain Technology

RFID (Radio-frequency Identification):
Allows for product visibility, tracing and tracking,
as well as automation of processes
Microchips used to store product identification and universally interpreted as an
Electronic Product Code (EPC)
Can lead to a reduction in labor costs and product theft
Easy access to information regarding current inventory levels.
Cloud Computing:
Easy access to networks with computational resources
No long-term contracts; pay as you go
Avoid initial costs for investment of infrastructure
Creates opportunities for management to prioritize
decision-making strategies by shifting technical responsibility
to a third-party expert for a cost-efficient price
-----------------------------Source: Coyle, J., Langley Jr., C., Novac, R., & Gibson, B. (2012). Supply Chain TechnologyManaging Information Flows.
In Supply Chain Management: A Logistics Perspective (9e [ed.]. ed., pp. 202-203). Mason, OH: South-Western Cengage
Learning.

21

SMC International Global Case Study #646747

Part B

Part A

11: Implement Supply-Chain Technology

The Total Annual Cost (New Order Cost)
Order Quantity (Units)

444.146453

Number of Units per Case

29.609764

Orders Per Year

165.814676

Annual Ordering Cost

7,680.535777

Annual ICC

7,959.104432

NEW Annual Total Cost ()

15,639.640209

% Change

Labor cost

- 1.680000

Order cost w/ reduced Labor

46.320000

OLD Annual Ordering Cost

7,959.104432

OLD Annual Total Cost ()

15,918.208864

1.75000%

22