Executive Summary
Problem
Verenigde Buizen Fabrieken (VBF), a tubing manufacturer, is faced with inventory and plant capacity concerns. VBF currently has high inventories and low inventory turnover. We have found a way to potentially shrink inventories and decrease plant costs substantially by changing the production cycle times using a well-known production model. Growth in the thick-walled tubing market is also making VBF question its plant capacity requirements. We also address a number of other issues that could help VBF efficiency throughout the plant.

Analysis
We analyzed VBF production using the economic order quantity model (EOQ) for shared facilities and found a lower cost production cycle schedule that we believe will greatly help VBF to be more responsive to customer needs, reduce inventories and working capital, as well as increase efficiency within the plant. We focus on the EOQ model and its implications for the firm. Exhibit 3A shows the spreadsheet calculations we used to arrive at the shared facility economic order quantity that we are recommending. We compiled costs associated with setting up for products and for carrying the required level of inventory. Setup costs were given as $800 per hour and accounted for the loss in contribution due to changeovers. The cost of carrying inventory was represented as a 24% variable cost. It is given that tubing costs $400 per metric ton; therefore, we use $96 ($400/ton*24%) per ton per year as our carrying cost. The cycle schedule arrived at is just over 38 runs per year given the assumptions of costs and the EOQ model (compare this to the approximately nine runs per year currently used). The proposed total inventory cost is $168,206. The current total cost of $377,039 is much greater at nine runs per year. Our calculated inventory cost is only 44.6% of this figure.

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