Controlling inventory is one of Wheeled Coach's toughest problems. Operating according to a strategy of mass customization and responsiveness, management knows that success is dependent on tight inventory control. Anything else results in an inability to deliver promptly, chaos on the assembly line, and a huge inventory investment. Wheeled Coach finds that almost 50% of the cost of every ambulance it manufactures is purchased materials. A large proportion of that 50% is in the chassis (purchased from Ford), aluminum (from Reynolds Metal), and plywood used for flooring and cabinetry construction (from local suppliers). Wheeled Coach tracks these inventory items quite carefully, maintaining tight security/control and ordering carefully to maximize quantity discounts while minimizing on-hand stock. Because of long lead times and scheduling needs at Reynolds, aluminum must actually be ordered as much as 8 months in advance. In a crowded ambulance industry in which it is the only giant, its 45 competitors don't have the purchasing power to draw the same discounts as Wheeled Coach. But this competitive cost advantage cannot be taken lightly, according to president Bob Collins, "Cycle counting in our stockrooms is critical. No part can leave the locked stockrooms without appearing on a bill of materials." Accurate bills of material (BOM) are a requirement if products are going to be built on time. Additionally, because of the custom nature of each vehicle, most orders are won only after a bidding process. Accurate BOMs are critical to cost estimation and the resulting bid. For these reasons, Collins was emphatic that Wheeled Coach maintain outstanding inventory control. The Global Company profile featuring Wheeled Coach (which opens Chapter 14) provides further details about the ambulance inventory control and production process. If you were to take over as inventory control manager at Wheeled Coach, what additional policies and techniques would you initiate to ensure accurate inventory records? How would you go about implementing these suggestions?

Production Policy

Emarpy Appliance is a company that produces all kinds of major appliances. Bud Banis, the president of Emarpy, is concerned about the production policy for the company's bestselling refrigerator. The annual demand has been about 8,000 units each year, and this demand has been constant throughout the year. The production capacity is 200 units per day. Each time production starts, it costs the company $120 to move materials into place, reset the assembly line, and clean the equipment. The holding cost of a refrigerator is $50 per year. The current production plan calls for 400 refrigerators to be produced in each production run. Assume there are 250 working days per year.

1. What is the daily demand of this product?
2. If the company were to continue to produce 400 units each time production starts, how many days would production continue?
3. Under the current policy, how many production runs per year would be required? What would the annual setup cost be?
4. If the current policy continues, how many refrigerators would be in inventory when production stops? What would the average inventory level be?
5. If the company produces 400 refrigerators at a time, what would the total annual setup cost and holding cost be?
6. If Bud Banis wants to minimize the total annual inventory cost, how many refrigerators should be produced in each production run? How much would this save the company in inventory costs compared to the current policy of producing 400 in each production run?