Graduate School of Business

Operations Management Project

As an Operations Management Consultant, XYZ has hired you to help determine how it
can improve its operations management (improving forecasting accuracy, minimizing
waste, developing supplier relations, etc) by using its current resources in a cost effective
manner. Furthermore, you should provide both short-term solutions to their problems and
long-term ones specially that the market is growing and XYZ want to increase its market
share in the local market as well as expanding internationally (in Africa) in the upcoming
years.

Presentation Structure and Layout

You are required to undertake group research project and to prepare a presentation.
The following main sections must be included in your presentation.
 Cover Page: Student Name, Student Registration Number.
 Executive Summary.
 Identification of the key approaches, concepts that apply to these issues; such as
Techniques, Methods, Models, Tools, Strategies etc. You would be expected to
provide justification of every aspect and solution to every issue you identified
within the lectures and textbooks recommended in the first lecture; you can even
use other operations management topics in other references that you might find
relevant.
 Reflecting and relating your findings using appropriate illustrations and tables.
 Conclusion: Overall conclusion of your proposed action(s), you may also provide
evidence from literature that these issues are common in similar business contexts
and how improvements are usually attainable.
 Proper reference list in the end of the report. Harvard style for both citations and
reference list could be used.

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

XYZ Company for Alkyd resin:

Introduction:

Paints occupy a prominent place in the cultural history of mankind. People have always
been fascinated with colors and used paints for two main reasons; decoration or protection
to an object or surface. A paint or coating is defined as a liquid or mastic composition
designed to act as a thin layer which is converted to an adherent film after being applied.
Paints and coatings contain specific ingredients that all play a role in their performance
properties including durability and final appearance. In general, modern paint is a complex
mixture of components that comprises binder (resin), additives, pigments and solvents
(see figure 1).

Solvents (Liquids)

Pigments
Additives

Resins (Binder)

Figure 1

Product:
An alkyd is a polyester modified by the addition of fatty acids and other components.
Originally, the word alkyd was "alcid", reflecting the fact that they are derived
from alcohol and organic acids. The inclusion of the fatty acid confers a tendency to form
flexible coating. They have a max. capacity (actual output) of 60000 tons/year (8 hours
per day, 260 working days/year). The original alkyds were compounds of glycerol and
phthalic acid sold under the name Glyptal. These were sold as substitutes for the darker
coloured Copal resins, thus creating alkyd varnishes, which were much paler in colour.
From these, the alkyds we know today were developed.

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

Binders (resins) are considered as a crucial component that is present in all types of paints.
It binds or glues ingredients (pigments and additives) of paint together and provides
durability & resistance properties to the paint. Binders (resins) come in several forms such
as Latex, Alkyd, Epoxy and Polyurethane in accordance to its industrial usage. In alkyd
paint, the binder is a synthetic resin, which is called an alkyd resin. Alkyd resin is used in
varnish, lacquer, sealer, etc.

XYZ Co is an Egypt-based company engaged in the production of Alkyd resin for the
painting industry and owned by mainly 3 shareholders. The owners started their business
in 1998 in Borg El Arab industrial zone. The total sales for XYZ were around 30 Million
Egyptian pounds during year 2018. The company is operating under a strategy that aims
to minimize the overall cost of operation (cost leadership).

During the last board of directors meeting, there was a hot discussion about the future and
prosperity of the business. The General Manager shared the latest sales numbers. He
claimed that sales numbers grew with more than 10 % from 2017 to 2018. However, in
2019, the sales numbers were not good. Sales started to decline while the market is still
expanding (local and regional) (See the following table). On the other hand, competitors
started taking market share on the company expense.

Month Year 2017 Year 2018 Year 2019

Jan 4000 4650 5200
Feb 4500 5200 5000
Mar 5400 6150 4900
Apr 7200 8000 4850
May 6700 7400
Jun 4250 4900
Jul 3800 4600
Aug 3600 4300
Sep 4200 5100
Oct 4300 5300
Nov 4400 5450
Dec 4600 5700
Average
4750 5370
(Tons/month)
Total annual
sales 56950 64450
(Tons/year)

From the operations point of view, the operations director identified that they are
continuously trying to minimize the operating costs in light with the organization low cost
strategic orientation. However, the operations director claimed that they have regular
problems coming from suppliers; delays, quality problems, etc. He mentioned that the
relationship with the suppliers needs to be reevaluated with respect to their strategic
importance. He also added that they internally are facing some quality problems that need
special attention. Although all quality problems are resolved before reaching customers,
they are still contributing in raising the costs of operations.

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

The Marketing Director identified that consumer needs are well defined and market
surveys confirm that consumers are generally happy with the company’s product.
However, the surveys affirmed that they are not always happy with the selling price,
compared to competitors nor they are happy with delivery terms. The Marketing director
referred to the continuous delivery delays to customers.

Operations

Forecasting:

Forecasting is not a significant activity at XYZ due to several factors. Alkyd could be
considered as a highly standardized product, which creates relative stability in usage
requirements. XYZ get their raw materials from both local and international suppliers.
The lead times of local suppliers are relatively short (8 working days) while those of
international suppliers (around 1 month) are relatively long. There is a fair degree of
production flexibility in terms of product customization. However, the customization had
little effect on supply requests as the customization affects the formula of alkyd resin (the
additives and the time of production) only with no effect on the raw materials used in
customized products. As a result of these factors, the company relies mainly on moving
average forecasts.

Quality

Quality is strongly emphasized at XYZ. Employees are trained in quality concepts and the
use of quality tools. Training is incorporated on-the-job so that employees can see the
practical applications of what they are learning. Employees are responsible for performing
in-process quality checks (quality at the source), and to report any defects they discover
to their supervisor. However, it appears that the time needed to perform each step is critical
for delivering products to customers in a timely manner. The close monitoring of the time
for each step revealed that step 8 (as an example) takes around 25 min to reach acceptable
A.V. value. However, the accepted norm within this industry is to take 20 min. (±1 min).
The standard deviation of the process is 1.7 min. So, the quality team decided to collect a
sample data (20 samples each with 5 observations) about the current timing (in min) of
step 8 as shown in the following table:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 23 22 21 24 23 22 22 20 21 24 22 23 19 22 19 23 19 20 21 24
2 21 21 23 24 24 21 23 21 22 23 22 22 22 21 20 24 22 23 22 25
3 22 23 22 23 22 23 23 20 19 25 23 23 23 23 22 23 19 22 24 24
4 19 20 24 22 21 19 24 23 23 22 22 24 24 24 22 21 22 24 25 23
5 22 22 22 19 20 22 22 24 23 25 19 24 25 22 23 19 20 19 19 19

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

Suppliers

Approximately 40 local and international vendors supply parts and materials to XYZ. In
general, XYZ select suppliers based on some predetermined criteria (ex. cost, quality,
delivery, service levels, etc). They select suppliers (both local and international) that are
ISO 9000 certified. They have an approved supplier list that is updated annually. It could
be identified that the procurement team (with whatsoever supplier) are very much
concerned with complying with the strategic posture of low cost strongly recommended
by the top management.

It is also worth to mention that the bulk of the international supplies (70%) are coming
from 2 main suppliers (divided equally between them) while the main bulk for local
suppliers spent (60%) are coming from three suppliers.
The main problem facing XYZ is with the international supplies. It takes long lead times
to get their needs from international supplies. XYZ start thinking to try out insourcing one
material coming from one of the two international suppliers (the soya bean oil from a
German supplier).

Thus, they collected some primary data about the fixed and variable costs of each option
as shown in the following table:

Outsource Insource
Fixed cost None LE 100000
Variable cost LE 30/ton LE 15/ton

Nevertheless, it is not only the cost that needs to be considered while taking this strategic
move. Other factors (quality, flexibility and delivery) needs to be further analyzed to
assess the outsourcing vs. insourcing decision.

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

Inventory and order fulfilment

The company attempts to minimize the amount of inventory. The company has adopted
point-of-use replenishment for some areas of operations, having deliveries come directly
to the production floor. However, there is a real need to reassess this strategy for
international purchases. The current model of ordering and inventory ignores calculated
economic order measures as well as quality discounts that might be offered. For example
the needs of XYZ from the soya bean oil; being as a crucial ingredient and imported from
an international supplier has a total demand of about 300 tons/month. Ordering costs are
120 LE per order, carrying costs are LE 9 per ton a month. Orders less than 75 tons will
cost LE110 per ton, 76 and less than 150 will cost LE 105 per ton, 150 and less than 200
will cost LE 100 per ton and larger orders will cost LE 95 per ton. Currently, the
organization has an order quantity of 350 tons per time. The lead-time needed from
placing an order till having the order in hand is around 30 days on average.

Finished products usually are immediately shipped to the customer, which in fact targets
enhancing the company's delivery performance and minimizing finished goods inventory.
However, lately they received a lot of complaints from dealers regarding lost orders and
the time required to process these orders.

The inventory manager and the marketing manager decided to perform an initial study to
the flow of customer orders, starting the arrival of the customer order till the delivery of
the order to the customer.

The following information summarizes the results of their preliminary study:

1. The customer order is sent to XYZ either by fax or e-mail. One out of 100 orders
gets lost accidently.
2. The printed order sits in an inbox 1hr on average before being picked up by the
internal mail service.
3. It takes the internal mail service 1 hr. (average) to deliver the order to the picking
area.
4. Once delivered to the picking area, the order sits takes 1 hour average before being
processed.
5. Once processes, it takes about 5 min. to make sure that the item is in stock.
6. If the requested product is in stock, a worker picks it to an inspector who takes 2
min to check the order for correctness. However, 1 out of 200 orders shipped are
wrong.
7. The transportation division takes the order to the customer (delivery time 3-5 days
with some orders being delivered after one week) with 100% correct deliveries.

Operations Management Dr. Nevien Farouk Khourshed

 Graduate School of Business

Aggregate planning

Planners of the company are about to prepare the aggregate plan that will cover 8 months.
They now want to evaluate a plan that calls for a steady rate of regular output, mainly
using inventory to absorb the uneven demand but allowing some backlog. They intend to
start with zero inventory on hand in the first period. Assume a level of output rate of 5000
tons per period with regular time. They decided to use overtime to make up for lost output.
Besides, they decided that subcontracting are not allowed. The maximum amount of
overtime output per period is 500 tons per month. The regular time cost per ton is 270 LE
while the overtime cost per ton is 300 LE. The holding cost is 9 LE per ton per month and
the backorder cost is 20 LE per ton per month.

Operations Management Dr. Nevien Farouk Khourshed