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Operations Management Principles And Techniques Finance Essay

Magalies Citrus was founded in 1959 and was originally only used as a pack house for fresh fruit. In 1965 the company started manufacturing fruit juice concentrates to compensate for the low prices of fresh fruit. The company was publically registered in 2005 and operates on a shareholder basis.

Magalies produces a large variety of citrus based products including fruit juice concentrates and citrus oils that are exported to countries like the United States. Some fruit juice base concentrates are also imported by the company from countries such as India and Japan. These base concentrates are used by the company to mix some of their 60 recipes. About 50 000 tons of citrus fruit a year is processed into approximately 3 000 000 litres of fruit juice concentrate.

The company implements strict quality control standards and are audited regularly to ensure that these standards are enforced. The company is also involved in various Black Economic Development projects throughout South Africa.

Products

The company manufactures various flavours of fruit based concentrate ranging from citrus based products such as orange concentrate to non citrus based products such as peach and pineapple concentrates. The concentrates are sold in the following container sizes:

1 litre PET bottle

200 litre steel drum

2 litre plastic bottles

650 litre flexi container

5 litre plastic bottles

750 litre flexi container

20 litre plastic drum

1000 litre flexi container

50 litre plastic drum

The concentrates are also mixed and sold at the following ratios of fructose to sucrose:

10%

60%

20%

70%

40%

100%

50%

Furthermore the company also produces various citrus based oils which are collected by piercing the skins of the fruit while fresh running water flows over the fruit. Later the oil is separated from the water and purified.

For the purposes of this project only two different concentrate processes, namely 100% orange and 100% mango were analyzed, as these processes are good representations of the processes involved in manufacturing all the other concentrate products. All citrus based products follow steps similar to the 100% orange in the production line from fresh fruit to bottled concentrate, while all non-citrus based products follow the same processes as the 100% mango from international order placed to bottled product.

Processes

The basic processes of citrus based products are shown in the flow diagram below.

All non-citrus based products are ordered form from countries like India and Japan in raw concentrated form and added into the mixing tanks when needed to mix necessary recipes and ratios.

Operations Management principles and techniques.

Current Operation Management

Magalies Citrus is currently producing all their products on a 24Hr production policy. This is a very misleading idea of production. When 24 hour production system is heard of, the immediate thought that comes to mind is that obviously a 24 hour production policy will increase the total production of the company thus enabling the company to sell more products ultimately contributing to improving the company’s net income.

This, however, is a common mistake made by companies. Yes, the amount of produced products does increase, and yes, this will enable the company to sell more products, but this also increases the company’s inventory costs. Inventory management is one of the major areas that companies should attend to, as products in inventory only cost the company money and in turn reduces the net income. These costs are referred to as Inventory Holding cost, or just Holding cost.

Magalies Citrus thus needs some kind of principles or techniques to help them improve their inventory management and cut away unnecessary costs, ultimately assisting in optimizing the company’s production policy.

Proposed Operations Management Principles an techniques

After thorough investigation and research, it has been decided to introduce the principles and techniques of “Economic Order Quantity” (EOQ) and “Material Requirement Planning” (MRP) to Magalies Citrus.

Economic Order Quantity (EOQ)

Essentially, EOQ is based on an accounting formula that determines effective quantity of products to produce (batch sizes of production) and when a new batch should be started to ensure that there will always be enough stock to sell to customers but also to ensure that there is no unnecessary costs to the company caused by extra inventory. When this is accomplished, companies can sometimes tremendously increase their net income.

Suppose a company has a total holding cost of R 4 000 000 per annum, and after they applied EOQ they succeeded in reducing their holding cost with only 5 percent, the company will save R 200 000 per annum.

As seen, saving on inventory costs can make a huge difference, depending on the size of the company.

Because of Magalies Citrus’s 24hr policy, applying EOQ will not only contribute to reducing the inventory cost, but will also reduce the total monthly cost as they will not spend time producing unnecessary products that will only end up in inventory. Other monthly costs include : Salaries, Production Costs, Water en Electricity bills, etc.

Material Requirement Planning (MRP)

MRP systems use the “Product Structure Tree” and the demands for each product produced to determine the following:

The number of parts / materials needed to produce a product

A schedule specifying when the required materials should be ordered or when a specific process in the production line should be started.

MRP systems also ensure that there will always be enough parts / materials available for production and ready to be sold / delivered to customers.

To implement an MRP system, one has to construct a “Product Structure Tree” for the products as well as the respective lead times for each of the materials.

The “Product Structure Tree” indicates the Bill of materials. The Bill of materials identifies the required materials used, and the correct quantities of each of these materials used to produce each product. The “Product Structure Tree” for the Orange and Mango juice is shown in Figure XX on page XX.

The lead time of a material is the time it takes for the mentioned materials to be ready for the next level in the product tree where the material is needed.

MRP can be an extremely valuable technique when a company uses the same production process or equipment to produce products in batches. MRP and EOQ go hand in hand when it comes to saving unnecessary costs and ultimately optimizes the company.

MRP is thus a perfect way for Magalies Citrus to plan their productions and to control their inventory. Together with EOQ, the MRP technique will certainly assist Magalies Citrus to save unnecessary costs caused by products stored in inventory.

Implementation of chosen techniques

After deciding what techniques will benefit Magalies Citrus, it was implemented using the given data acquired from the company. The implementation of the EOQ technique is represented on page XX below, followed by the MRP implementation on page XX. The data that was supplied by the company and used for the implementation of the techniques are given in tables 1 to 6 below.

Acquired Data from Magalies Citrus

Prices, lead times and ordering sizes of additive ingredients

Ingredient

Price / litre

Ordering sizes

Lead time

A

R 4.80

20 litres

5 days

B

R 13.21

20 litres

5 days

C

R 26.49

20 litres

5 days

D

R 26.67

20 litres

5 days

Table 1

Prices, lead times and ordering sizes of base fruit ingredients

Ingredient

Price

Ordering sizes

Lead time

IN Season

OUT of Season

Oranges

R 1400 per ton

R 2100 Per ton

at least 5 tons

10 days

Raw Mango Concentrate

R 11.67 per litre raw concentrate

R 17.50 per litre raw concentrate

1500 litres

15 days

Table 2

One ton oranges produces 600 litres fresh juice

600 litres fresh juice produces 150 litres orange juice concentrate

One ton oranges thus produces 150 litres orange juice concentrate

Calculated the cost per litre orange juice concentrate

IN Season

Out of Season

R 9.33

R 14.00

Table 3

The seasonal demands are calculated as 40% IN Season and 60% OUT of Season of the annual demand

DEMANDS in litres for the final produced concentrate

 

Average Annual demand

Average monthly demand

IN season monthly Demand

OUT of season monthly Demand

 

Oranges

331 000

27 600

22 100

33 100

Mango

280 000

23 300

18 700

28 000

Table 4

Setup, holding and production costs are in Table 5 below

Setup cost

R 3 700.00

Holding cost per litre per annum

R 10.43

Production Costs per litre

R 0.59

Table 5

Table 6 below represents the cost layout of the final products

Final Concentrate

Amount of ingredients per litre final concentrate

Ingredient

Associated cost per litre final concentrate

Orange

920 ml

Raw Orange concentrate

IN Season = R 8.59

OUT Season = R 12.88

26 ml

Product A

R 0.12

22 ml

Product B

R 0.29

32 ml

Product C

R 0.85

Mango

937 ml

Raw Mango concentrate

IN Season = R 10.93

OUT Season = R 16.40

18 ml

Product A

R 0.09

15 ml

Product B

R 0.20

24 ml

Product C

R 0.64

6 ml

Product D

R 0.16

Table 6

EOQ implementation

The EOQ implementation is represented below

EOQ Calculations

In-season

 

Optimal order quantity

t* (days)

Leff (days)

RoP

Orange

14298

19

10

7367

Mango

13152

21

15

9350

Out of-season

 

Optimal order quantity

t* (days)

Leff(days)

RoP

Orange

17498

16

10

11033

Mango

16093

17

15

14000

Production cost(R/litre)

In-season

Out of-season

Orange

R 10.44

Orange

R 14.73

Mango

R 12.60

Mango

R 18.07

Optimal unit cost

In-season

Orange

Total optimal cost/Demand=

R 10.72

Mango

Total optimal cost/Demand=

R 12.91

Out of-season

Orange

Total optimal cost/Demand=

R 15.17

Mango

Total optimal cost/Demand=

R 18.55

After all the calculations were done, the following Ordering Policy was determined :

Order policy

In-season:

Orange

They need to start producing 14298 litres of orange juice concentrate when they have 7367 litres of orange juice concentrate left

Mango

They need to start producing 13152 litres of mango juice concentrate when they have 9350 litres of mango juice concentrate left

OUT of-season:

Orange

They need to start producing 17498 litres of orange juice concentrate when they have 11033 litres of orange juice concentrate left

Mango

They need to start producing 16093 litres of mango juice concentrate when they have 14000 litres of mango juice concentrate left

MRP implementation

The implementation of the MRP uses the same data given by the company as well as the EOQ ordering policy to assist with the optimal managing inventory levels.

Conclusion and Recommendation

Magalies Citrus has a 24 hour production policy and some changes made in their inventory management can cut away unnecessary costs and help save the company a lot of money, ultimately assisting in optimizing the company’s production policy.

After we did the calculations regarding the EOQ technique, we have found that Magalies Citrus would minimize their inventory costs if the following principles are implemented:

In the in-season, they need to start producing 14298 litres of orange juice concentrate when they have 7367 litres of orange juice concentrate left,

In the in-season, they need to start producing 13152 litres of mango juice concentrate when they have 9350 litres of mango juice concentrate left,

In the out-season, they need to start producing 17498 litres of orange juice concentrate when they have 11033 litres of orange juice concentrate left, and

In the out-season, they need to start producing 16093 litres of mango juice concentrate when they have 14000 litres of mango juice concentrate left.

Since inventory costs would be minimized, and ultimately increasing the net profit with a considerable amount, we would strongly recommend the above principle to Magalies Citrus.

The implementation of the MRP system can be of great value to Magalies Citrus and it is also very highly recommended. The MRP system ensures that there will always be enough material available for production and the correct amount of products to satisfy the customer’s demands.

We can also recommend that Magalies Citrus should improve remote and mobile access to ERP data, because this will simplify the implementation of the MRP system and it is a great way for Magalies Citrus to plan their productions and to control their inventory.

Appendix A

Extracts and summaries of journals containing literature of other applications of EOQ and MRP

Literature of other applications

The following research that has been done is direct paraphrasing out of published journals and the authors of this project takes no credit for any of the included documentation of the summaries of these journals. All credit is given to the resepctive authors of these journals in the reference list.

Supply chain inventory : pitfalls and opperunities

The journal summarizes Pitfalls as :

The supply chain consist of many different joints/parts with different objectives that may be different or even conflicting, thus the optimization of one part may affect other part in a negative way

The measure of efficiency of a system in a whole is based on the customer satisfaction and not on the different parts of the system.

Tracing data and keeping a status on all processes is essential for a business to run effectively and have goodwill with its customers

Inefficient information systems, a company’s information systems must be integrated with each other and should run a scheduling program MRP is a good system if the information systems are accurate.

Ignoring the impact of uncertainties this could lead to investment in the wrong resources and being over/understocked.

The more specialized stocking policy a company uses the less affect does uncertainty have on it.the correct policy an save acompany upto 40% in inventory costs

Internal customers, the companies needs are more importend than the customer’s

Incorrect inventory cost there is no standard in the calculation of the correct inventory cost, alot of other calculations use this vulue.

All the pitfalls can become oppertunities with proper management.

Business process integration as a solution to the implementation of supply chain management systems

According to the journal, Using the MRP system the following must be taken into account -demand, material in inventory, material backlog, forecasted demand

The MRP system is not a stand alone system to reach its most optimal impact on a production system it must be integrated with the rest of the company and its constraints/ limitations. It is preferred that the MRP system runs the scheduling on a ‘live’ database where the inventory levels and orders placed can be captured on a continuous base.

EOQ models for perishable items under stock dependent

selling rate

This journal discusses the use of 3 models with respect to perishable goods(e.g. fruit juice) the most applicable model for this report is model 1, being the closest imitation of the scenario at megalies citrus.

Model 1 – stock dependend selling and exponential decay

Investing in Reduced Setups in the EOQ Model

The EOQ model is not the optimal solution if the setup cost is higher than it should be.

The setup cost does have an optimization formula that take into account the cost of lowering setup cost the percentage lowered and the ratio between setup cost and the EOQ model. The same concept is applicable on the holding cost because of its affect on the economic order quantity.

Inventory management under random supply disruptions

This journal develops an inventory policy model that is able to deal with uncertainties and random behavior from suppliers. The model’s final formula is still the same (classic EOQ) but the calculations of the setup cost, holding cost and demand is different because of the probability of losing sales and the probability of backorders which will increase the costs.


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