PROJECT PROPOSAL

LUBRICANT OIL DIVISON (LOD)

1. Background of the Project

Middle of Marrch, Mr. Black, manager of LOD, approaced the management Science
Group at the Companys Headquarters with a request to do a priliminary
investigation of the LOD production/inventory opertions of packaged goods. It is my
undestanding that request is a follow-up on remarks in the Companys internal
auditors report about the current level of investment in stock at the LOD. In
particular, the auditors pointed out that the LODs stock turnover of packaged goods
was well below the companys target of 24 times per year, resulting in a level of
funds tied up in packaged goods judged as excessive.
I arrane for visit to the LODs production and warehousing facilites at sandpoint on
March 27 and 28, during which I had extensive discussions with Mr. Black, Mary
Clark, the stock control clerk, Bill Quick, the data processing supervisors. I also
consulted with the Cost Control Department a Headquarters. The following report
outlines my recommendations for a preliminary study, briefly motivates and
describes the proposed analysis and lists the resources required and a time-table for
the proposed study.
2. Executive Summary and Recomendation
It is recommended that the management Science Group undertakes a preliminary
study of the produstion/inventory opetions with the aim of establising whether a fullscale investigation is justified. In view of the form of the LOD operations, asuitable
model has to be developed snd tested first. A crude approximation suggests that the
potencial annual cost savings range between $30 and $500 per product.
The preliminary study would develop a mathematical model for determining politicies
that minimize the total operating costs associated with the production and
warehousing opertions of the LOD. This model would be applied to a representative
sample of packages goods and the result extrapolated to the LOD operations as a
whole. If the findings support the conclusion that all further costs for a fullscale study
will be recovered within the company policy payback period normally required for
such projects, a recommendation for undertaking such a full-scale study will be
made.

At the current internal analyst charge-out rate of $400, the cost of the preliminary
atudy amount to $8,000. Its recommendations would be submited within 6 weeks
after its commencement.
3. Statement of the Problem Situation
The auditor report states that the LODs stock turnover rate over the last two years
average 12 times per years and hence is well below the companys target rate of 24.
As a result they conclude that the amount of funds tied up in stocks is about twice as
high as the target level corresponding to the turnover rate of 24.
For the current customer delivery policy and production lead time, the average
amount of fund tied up in stocks and hence of the cost of carrying this investment for
any given product is proportional to the size of its stock replenishment batches. On
the other hand, the annual production setup cost is inversely proportional to the size
of replenishment batch for which the sum of these two costs is at its lowest possible
level. This also implies a best turnover rate for each product. A target turnover rate of
24 may thus be far from optimal in the sense achieving lowest total setup and stock
carrying costs.
If the objective is reduce total investment in inventories, it is preferably to set an
upper limit, rather than a target turnover rate. The model can then be used to find the
least expensive policiy to stay within this limit. This recognizes the fact that the best
turnover rate is different from product to product. The current customer delivery
policy offers the possibility for scedulling special production runs for direct delivery to
custimers, with the goods by-passing the inventory stage. They will then only be
handled once, rather tahn twice. This is currenly done for those product where large
customer order occur frecuently. A decrease product handling costs, but incrase the
annual number of incurred for spesial production runs and hence the annual setup
cost. It will also affect the best stock turnover ratio for the portion of the total
demmand met for stock.
The best policy iis the one which sets a cutoff
4. Brief Deskription of Proposed Analysis