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Initial Operational Process
Goals and Objectives
Recommendations for Action
• Gut feeling
• Ordered parts based on past usage
• Adjusted numbers
Golf courses expected
•Southern Toro’s definition of quality
•Quality from a customers perspective
•Total quality management (TQM)
•Goal #3: For Joe Jr. to become as profitable as possible moving forward with the business.
•Objective: Combining the value provided by achieving the prior two goals Southern Toro will have a much more customer centric business model. The customer defines the needs that our revised system is able to deliver on.
EOQ is the wrong method to use in the case of Southern Toro Distributor, Inc
•The weather is unpredictable; therefore, demand is unpredictable (EOQ
method requires a constant demand.
•Southern Toro needs to ensure that they keep a sufficient amount of
safety stock to ensure against customer stock outs (currently, they are
experiencing stock outs)
The fixed-time period model is the underlying model for two of the three solutions that we recommend.
q = quantity to be ordered
d = forecasted average daily demand
T = number of days between reviews
L = lead time in days
Z = number of standard deviations for a specified service probability
Std. Dev.(T+L) = standard deviation of demand over the review time and lead time
I = current inventory level
Goals and Objectives
•Goal #1: Improve the ordering accuracy to more closely follow demand to prevent costly stock-outs of products and the loss of customers.
•Objective: Work with RyTech to produce a ordering and inventory management system better suited to the unstable demand produced by the business.
New Operational Process
•Done through RyTech Software to cut
inventory levels by 30%
Internal Operational Issues
•Does not accurately reflect the demand
•EOQ is used best when demand is relatively uniform
Internal Operational Issues
•Cut back on spare parts or risk financing?
•Spare parts & storage space
External Operational Issues
•2008 stocked out
No Rush Orders
•Place orders 3 times a year
Increase in customers/revenue
•Distributes, installs & replaces irrigation
•Analyzing how the company determines
the quantities of irrigation products to order
to keep up with demand that shifts
•3 sets of order points
•Joe Melaney > Son taking over
•90% customer satisfaction
•Turn over 3 times/year
Our three possible solutions are:
(1) Have RyTech develop a software based on the fixed-time period model. Southern Toro would work closely with RyTech to create the underlying decision rules of the model
(2) By using the fixed-time period model, Southern Toro would create their own inventory management process
(3) Base Southern Toro’s inventory level on the highest level of sales during the past three years while taking into consideration the large country club project that will most likely take place in April.
•A: RyTech has experience with inventory modeling systems/software
•A: Fixed-time period model provides room for safety stock (especially between lead time and order receipt) > customer retention
•A: Demand is unstable – the fixed-time period model makes sense
•D. Fixed-time period model requires more vigilance – inventory monitoring on a monthly or weekly basis
•D. Higher level of inventory is required – higher storage costs
Solution 1: Advantages and Disadvantages
•A: Southern Toro should be using a more methodical way of forecasting
•A: Southern Toro had some issues with RyTech developing their current software – it may make sense to partner with someone else or develop their own system
•A: Demand is unstable – fixed-time period model makes sense versus basing off historical demand
•D: Southern Toro does not have the inventory management experience to develop an effective model on their own
•D: Southern Toro may not be able to develop an effective model – may end up wasting money on storage costs with an inaccurate model (holding wrong amount of inventory)
Solution 2: Advantages and Disadvantages
•A: Cost savings from an implementation and licensing standpoint
•A: Cost/time savings since Southern Torn wouldn’t have to monitor the inventory as heavily/closely
•D: Demand is unpredictable so historical demand may not provide an effective forecasting tool
•D: Could lost customers if they aren’t satisfying customer demand
Solution 3: Advantages and Disadvantages
We recommend that Southern Toro choose Solution #1 for the following reasons:
•Southern Toro needs a more methodical way of selecting inventory levels
•Underlying assumptions should be based on the fixed-time period model – Southern Toro will work with RyTech to develop
•q = d (T+L) + z Std. Dev.(T+L) - I
•q = quantity to be ordered; d = forecasted average daily demand; T = number of days between reviews; L = lead time in days; Z = number of standard deviations for a specified service probability; Std. Dev.(T+L) = standard deviation of demand over the review time and lead time; I = current inventory level
•Fixed-time period model > higher probability that Southern Toro could protect against stock outs
d = 65/365 (daily demand from 2009) = .178
I = 51 (2009)
q = d (T+L) + z Std. Dev.(T+L) - I
q = d (30+75) + 2.05(30.74) – I
q = .178(105) + 2.05(30.74) – 51
q = 18.7 + 63.02 – 51
q = 30.72
q = 31
q (for the year would be approximately) = 93
•Average demand for past 4 years : 34.75 > plug into equation above – q = 22 and q for the year would be 66
•Plenty of demand to cover the year plus some for safety stock
Series 176, Monitor Controller
•using a moving average forecast at the annual level - the fixed-time period model would provide Southern Toro with enough inventory to meet customer demand > higher customer retention and higher revenues
•Southern Toro need to ensure that all assumptions are correct
•larger investment of time and money from Southern Toro’s perspective could pay off for them
The Cost of Quality
•Internal Failure Costs
•External Failure Costs
•Failure: EOQ order rule for the RyTech System
•Poka-Yoke: The fixed-time period model for order
Goals and Objectives
•Goal #2: To be able to handle and capitalize on large-scale projects requiring large orders of products and greater amounts of storage space.
•Objective: More closely matching demand will allow for less spare parts taking up valuable facility space.