Harvard Case - EMMICO: How to Establish Economic Order Quantity
"EMMICO: How to Establish Economic Order Quantity" Harvard business case study is written by Prakash Sathe. It deals with the challenges in the field of Operations Management. The case study is 6 page(s) long and it was first published on : Aug 15, 2016
At Fern Fort University, we recommend EMMICO implement a comprehensive strategy to establish Economic Order Quantity (EOQ) for its key raw materials. This strategy involves a combination of operational improvements, data analysis, and technology integration to optimize inventory levels, reduce costs, and improve overall supply chain efficiency.
2. Background
EMMICO, a leading manufacturer of medical equipment, faces challenges in managing its inventory effectively. The company currently relies on manual processes and lacks a standardized approach to determine optimal order quantities. This leads to excess inventory, stockouts, and inefficiencies in its supply chain.
The case study highlights the key protagonists:
- Mr. Singh: The production manager, responsible for ensuring efficient production processes.
- Mr. Sharma: The procurement manager, tasked with sourcing raw materials and managing inventory.
- Mr. Gupta: The finance manager, responsible for controlling costs and maximizing profitability.
3. Analysis of the Case Study
To analyze EMMICO's situation, we can utilize the Operations Strategy Framework. This framework considers the following key aspects:
- Cost: EMMICO faces high inventory holding costs due to excess stock and stockouts.
- Quality: Maintaining consistent quality of raw materials is crucial for medical equipment production.
- Delivery: Timely delivery of raw materials is essential to avoid production delays.
- Flexibility: EMMICO needs to adapt to changing demand patterns and supplier availability.
- Innovation: Continuous improvement in inventory management processes is necessary to stay competitive.
By applying this framework, we identify the following key issues:
- Lack of Data: EMMICO lacks accurate data on demand patterns, lead times, and inventory holding costs.
- Manual Processes: The manual inventory management system is inefficient and prone to errors.
- Limited Technology: EMMICO hasn't fully leveraged technology to optimize inventory management.
- Lack of Collaboration: Communication and collaboration between departments (production, procurement, finance) are lacking.
4. Recommendations
To address these issues, we recommend the following:
- Implement EOQ Model: EMMICO should adopt the Economic Order Quantity model to determine optimal order quantities for each raw material. This involves analyzing demand, ordering costs, and holding costs.
- Data Collection and Analysis: EMMICO needs to collect accurate data on demand, lead times, and inventory levels. This data can be analyzed to refine EOQ calculations and identify potential improvements.
- Technology Integration: EMMICO should invest in an Enterprise Resource Planning (ERP) system to automate inventory management processes, track inventory levels in real-time, and generate accurate demand forecasts.
- Process Improvement: EMMICO should implement lean manufacturing principles to streamline its production and procurement processes. This includes reducing waste, improving efficiency, and enhancing communication between departments.
- Supplier Relationship Management: EMMICO should build strong relationships with its suppliers to ensure timely delivery, consistent quality, and potential cost savings.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: Implementing EOQ and adopting lean manufacturing principles aligns with EMMICO's core competency of producing high-quality medical equipment.
- External Customers and Internal Clients: Optimizing inventory management reduces production delays and improves customer satisfaction. It also benefits internal clients by providing accurate information and streamlining processes.
- Competitors: Implementing these recommendations will help EMMICO stay competitive by reducing costs, improving efficiency, and enhancing responsiveness to market demands.
- Attractiveness: The implementation of EOQ and lean manufacturing principles is expected to generate significant cost savings, improve inventory turnover, and increase profitability.
6. Conclusion
By implementing these recommendations, EMMICO can establish a robust inventory management system based on EOQ principles. This will lead to significant improvements in cost efficiency, supply chain efficiency, and overall business performance.
7. Discussion
Other alternatives not selected include:
- Outsourcing: EMMICO could consider outsourcing its inventory management to a third-party logistics provider. However, this might not be cost-effective and could compromise control over inventory.
- Just-in-Time (JIT) Production: Implementing a JIT system could minimize inventory holding costs but requires a high level of coordination and accurate demand forecasting.
Key assumptions of our recommendations include:
- EMMICO's commitment to data collection and analysis.
- The availability of appropriate technology and resources for implementing the recommendations.
- The willingness of employees to adapt to new processes and technology.
8. Next Steps
- Phase 1 (Short-Term): Implement a pilot project to test the EOQ model for a few key raw materials.
- Phase 2 (Mid-Term): Roll out the EOQ model to all raw materials and implement an ERP system.
- Phase 3 (Long-Term): Continuously monitor and refine the EOQ model, implement lean manufacturing principles, and foster strong supplier relationships.
By following these steps, EMMICO can successfully establish an effective inventory management system based on EOQ principles, leading to significant improvements in its operations and supply chain management.
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Case Description
EMMICO has just acquired Franz Kuerten and is trying to integrate its Vienna plant operations. The problem is the company is storing too much inventory at the plant and its off-site warehouse - up to five times the amount it needs for regular production. To hit the inventory sweet spot, student interns from the Tauber Institute for Global Operations at the University of Michigan are tasked with using two models to calculate economic order quantity. They will have to report their findings in a week.
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