Page 1Page 2Page 3Page 4Page 5Page 6Page 7Page 8Page 9Page 10Page 11Page 12Page 13Page 14Page 15Page 16Page 17Page 18Page 19Page 201988-11 Spring 1988 A Cost Anal ysis for Determining SOUTHERN METHODIST UNI\ the Optimal Method for an Inventory Expansion Rex CramerStephen Witherington MARYKAY COSMETICS A Cost Analysis For Determining The Optimal Method For An Inventory Expan OREM 4390 MAY 11,1988 DEPARTMENT OF OPERATIONS RESEARCH AND ENGINEERING MANAGEMENTSCHOOL OF ENGINEERING AND APPLIED SCIENCE DALLAS, TEXAS 75275MARYKAY COSMETICS A Cost Analysis For Determining The Optimal Method,. For An Inventory Expansion OREM 4390 MAY 11,1988 by Rex Cramer Stephen WitheringtonI1) INTRODUCTION: MaryKay Cosmetics is a Dallas based corporation involved in the development, manufacture, and distribution of an integrated line of cosmetics and accesories. Until the 1970's, MaryKay was a privately held company. The company became public in the latter part of the 70's in order to provide the capital necessary to support a forecasted growth rate of 30%+/yr in sales. The injection of new capital would provide the means by which all aspects of the corporation could grow and meet its potential. Most notably, the manufacturing capabilities would benefit the most in the form of increased production capacity. For several years after the public offering, the corporation did extremely well. The counter-cyclical nature of MaryKay's sales with respect to the national economy dictated a tremendous growth in the sales force. Due to the dynamics of the two income family, and its reliance on two sources of income, a downturn in the national economy means a corresponding increase in unemployment. In order to compensate for any lost income during these times, families augment their income by either finding a new employer, or enhancing their existing income through alternate means. During these economic downturns, MaryKaya rise in sales force above their normal expectations derived from internal growth projections in direct proportion to the severity of the recession. The recessionary state of the national economy Ipg 1 IUduring the the late 70's and early 80's, enabled MaryKay's expansion to continue due to product advances and the growth in sales force augmented by the state of the national economy. The bright growth prospects fostered some of the most spectacular expansion plans imagined. The ideal position that the company would had envisioned was one in which all aspects, fron4nanufacturing to distribution, would exist at a centralized facility. The location of this expansion would be at the corner of Stemmons freeway (I - 35) and the N.W. Highway in Dallas. The campus environment of this plan could have provided the ideal setting for continued growth of the corporation. The land had been purchased, the Glamour building, a showcase facility, was in full production, and the cornerstone of the entire plan was being constructed. The centralized corporate warehouse would provide the necessary storage space for growth into the next century. This warehouse would not be an ordinary conventional facility, a state of the art advanced storage and retrival system (AS/RS) was constructed to meet the needs of the entire corporation (see exibit 1 for a detailed overview).In late 1982, the price of oil collapsed from a high of $39/bbl to a low of $9/bbl. The inflationary fears fostered by the 1970's dramatic rise in energy costs abated, andthe national economy began the long road to recovery. Unemployment levels subsided and the immediate impact on MaryKay's cash flow was sufficient to foster the concern over Ipg2 Ia possible hostile takeover. The assets of the corporation were now worth more than the net present value of its forseeable cash flows. In order to avoid the possible loss of control of the corporation to an outside source the board decided to initate a leveraged buyout (LBO). This consistsof a tender offer for all of the outstanding publicly traded shares in the corporation, which eliminates the voting rights on corporate matters that ownershipofcommonstockentitlesitsownerto.The immediateresultofthisactionwasdebtlevelswhich threatened the ability of the company to remain competitive. To alleviate this position, assets were sold, and expansion plans severly curtailed. The land set aside for future growth was sold and operations condensed. The net effect of this action was a severly limited corporation in terms of cash flow and possible avenues of expansion.2) PRELIMINARY INTENTIONS: A Routing Study After consulting with the management of MaryKay Iwe were given permission to pursue a study concerning Ipossible improvements in the routing of forklifts used in the transportation of raw materials to the production lines. The objective of this study was to maximize the efficiency of inventory processing in order to obtain the best possible flow Iof raw materials throughout the manufacturing warehouse. Ipg3 IIA preliminary investigation turned up the conclusion that a 20% inefficiency existed in the system. This result concurred with a much more detailed and accurate study performed by the in house MIS department. By taking the existing three months of inventory information on the computer system at MaryKay, and determining the exact amount of time spent processing the inventory as a whole, then subtracting the amount of time used for re-stocking and transportation from the AS/RS warehouse. We then took this figure and when divided by the total amount of time available in the system gave us a good estimate of the system efficiency. Our investigation now centered on how to alleviate this area of concern. Several hours of consulting with personel in the Production and Inventory Control department acknowledged that the majority of discrepancy between the expected and actual values was caused by the lack of available storage Ifacilities in the manufacturing warehouse. Barring this condition, the actual efficiency of the forklifts would rise to 95+%. The current capacity of the manufacturing warehouse is 6500 palates, the current demand is 8500+ palates. The differential is stored at the AS/RS facility approximately 3 miles from the manufacturing facility. Figuring in the 2 day tunaround for raw materials to reach the manufacturing facility, and the re-palitizing of raw materials not used in the day's production run, expected efficiencies would climb