Whole Foods utilizes recycled bags to pack customer orders. Up until now, WF has been outsourcing the production of these bags. WF is considering purchasing a manufacturing facility in Texas called WholeGoods to support their core business functionality where they can produce uniforms, flyers, and possibly shopping bags. Kal Fisher’s team needs to determine whether or not they should consider producing the recycled shopping bags in-house at this manufacturing WholeGoods facility. However, there are many factors to consider.
Based on historical data, the forecasted annual demand for the recycled shopping bags is 18500 units. The WG’s manufacturing plant will operate 50 weeks per year.
WG's financial analysts have established a cost of capital of 19% on the use of funds for investments within the company. In addition, accounting information shows that a total of 4% of costs were spent on taxes and insurance related to the company's inventory. It has been estimated that another 2.5% was lost due to inventory shrinkage, which included damaged goods as well as pilferage. Finally, 4.5% was spent on warehouse overhead, including utility expenses for heating and lighting.
An analysis of the purchasing operation shows that approximately two hours are required to process and coordinate an order for Whole Foods regardless of the quantity ordered. Purchasing salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of 135 orders showed that $2375 was spent on telephone calls, e-mails, paper, and postage directly related to the ordering process.
Currently the company has a contract to purchase the recycled shopping bags from a supplier at a cost of $0.43 per unit. However, with the opening of the WholeGoods manufacturing facility, Whole Foods will now have the capacity to produce support items themselves. As a result, Whole Goods is considering the alternative of producing the recycled bags itself.
Forecasted utilization of equipment shows that production capacity will be available for the shopping being considered. The production capacity is available at the rate of 1000 shopping bags per week. It is felt that with a short lead-time, schedules can be arranged so that the shopping bags can be produced whenever needed. Production costs are expected to be $0.41 per bag.
A concern of management is that setup costs will be significant. The total cost of labor and lost production time is estimated to be $50 per hour, and it will take a full 8-hour shift to set up the equipment for producing the Leisure Beach Handbags.
Requirements:
Develop a one page executive report for Whole Foods management that will address the question of whether the company should continue to purchase the shopping bags or produce the bags in-house at Whole Goods manufacturing Include the following factors in your report:
Findings and Conclusions (include responses to the following)
Clearly define the holding cost, ordering cost (when ordering from supplier), and set-up cost (when producing the part) for each scenario (ie. Make and Buy).
Develop an inventory policy (how many shopping bags to order and how frequently) for the following two alternatives (a) ordering a fixed quantity Q from the supplier or (b) ordering a fixed quantity Q from in-plant production. Be sure to include the (1) Optimal quantity Q* and (2) the total annual cost for each option.
Sensitivity Analysis: Would the decision change if production costs increase by just $0.01 per bag? If so, how?
Recommendation (based on your analysis, which option do you recommend? Why?)
Make a recommendation as to whether Whole Foods should purchase or manufacture (at WholeGoods) the recycled shopping bags. What is the savings associated with your recommendation as compared with the other alternative? Besides the differences in cost, what other factors need to be considered? (MAKE SURE TO PROVIDE A THOROUGH DISCUSSION)
Appendix (this should include a summary table of the costs for each option)
Please show all calculations.