Consider a production process at Omega Packaged Seafood Company, where a different finished product SKU is made every day. Each day, a SKU requiring six separate, unique seafood ingredients provided by six separate, independent suppliers is produced. These six seafood components need to be fresh, are ordered a week before Omega will be using them and are expected to arrive early in the morning of the day Omega uses them. The maximum production capacity each day is 1,000 units. Each finished product unit sells for $100 and the purchase cost of the six unique components combined is $60 per finished product unit. Other variable costs are $20 per finished product unit. The fixed costs for a days capacity total $10,000.

Omega Company bases its budgets and production plans on a 95% capacity utilization level. In other words, it must average 950 units of production daily over the month in order to reach its monthly shipment and profit goals. This means its various seafood component suppliers as a whole must deliver the complete set of six components daily 95% of the time. That is, the deliveries of all six suppliers in the aggregate is on time 95 days out of 100 days. This is called aggregated on-time delivery reliability percentage. The finished product cannot be made unless all six components are delivered on time.

Assignment Questions

1. If Omega has six separate, direct, independent suppliers, one for each ingredient, what must be the on-time reliability percentage of each individual supplier each day in order to meet its goal of 95% capacity utilization? (For this question, assume all six suppliers have the same individual on-time reliability percentage.)

2. What does the daily operating income statement for todays Omega production look like if each of the six suppliers delivers 100% on time, i.e., if the operations utilization is 100%?

3. If each of the six individual suppliers had an individual 95% on-time delivery percentage, what would the aggregate (for all six suppliers combined) on-time delivery percentage be? Using this calculated number, what would be Omegas monthly opportunity cost of lost operating contribution profit dollars? (Assume each supplier had a 95% on-time delivery percentage for all 21 working days per month at Omega.)

4. If Omega chose to source the six components from just three suppliers instead of six (i.e., each supplier providing two of the ingredients), what would the required individual supplier on-time percentage be for Omega to achieve its budgeted 95% capacity utilization?