Page 604 - Introduction to Business

578 PART 6 Managing Business Operations, Management Information Systems, and the Digital Enterprise

Case in Point

Operations Management Is a Powerful Competitive Weapon

Toyota Motor Corporation has long straining Toyota’s human and technical resources and
been recognized as one of the most undercutting one of Toyota’s most critical strategic
successful companies in the world. advantages: operations management in general and
Toyota nearly doubled its revenue in the past quality in particular. The marriage of efficient produc-
decade and redefined competition in key areas of tion systems to an obsessive concern for quality has
the auto industry. However, Toyota suddenly finds helped Toyota establish a reputation for bullet-proof
itself plagued with increasing quality problems and reliability that remains a huge competitive advantage.
having to launch a world-wide program to simplify
Source: The Wall Street Journal, August 4, 2004, pages A1 and A2.
its production systems.
Questions
On the agenda, Toyota has as its next big goal to
increase its share of the global market from 10% to 15% 1. Do you agree with Toyota’s ethics policy for
in the next decade. If achieved, Toyota would become procurement and purchasing?
approximately the same size No. 1 auto maker General 2. In what ways could Toyota’s ethics policy for
Motors is today. Such an ambitious goal is tough, procurement and purchasing be improved?

costs, the cost of operating the storage facility; the cost of insuring the items;
the cost of depreciation, obsolescence, deterioration, spoilage, breakage, and
interest cost The cost that is incurred pilferage of the items; and the interest cost. The interest cost represents the
by having money invested in inventory expense that is incurred by having the money invested in inventory. For exam-
ple, if a company asks for a bank loan in order to keep in inventory one unit of
an item valued at $20,000, and the interest rate for the loan is 10 percent per
year, then the interest cost would be ($20,000)(0.10) $2000 per year. Interest
cost is frequently the major component of holding cost. The holding cost typi-
cally ranges between 20 and 40 percent of an item’s value. In order to minimize
holding costs, one would try to place small but frequent procurement orders.
To illustrate how an operations manager can find an appropriate inventory
level, we will consider a basic inventory model. In this model, the following
assumptions are made:
• Demand for the item is known and constant.
• The ordered units are received all at once.
• The cost of the item is independent of the number of units ordered.
Let us use the following notation:
D annual demand for the item (in units per year)
O ordering cost ($ per order)
h annual holding cost as a percentage
V item’s value ($ per unit)
H hV annual holding cost in dollars ($ per unit per year)
Q quantity procured in each order (units)
N number of orders per year
L average inventory level (units)
AOC annual ordering cost ($ per year)
AHC annual holding cost ($ per year)
TAC AOC AHC total annual ordering and holding cost ($ per year)
Then
N D/Q and L Q/2

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