The Current Situation During the interview process, Mike got the impression that

Question

The Current Situation

During the interview process, Mike got the impression that there was a lot of opportunity for improvement at Northcutt Bikes. It was only after he selected his starting date and requested some information that he started to see the full extent of the challenges that lay ahead. His first day on the job really opened his eyes. One of the first items he had requested was a status report on inventory history and shipped orders. In response, the following now was on his desk the first day from the warehouse supervisor, Art Demming:

“We could not compile the history you requested as we keep no such records. There’s just too much stuff in here to keep a close eye on it all. Rest assured, however, that we think the inventory positions on file are accurate, as we just completed our physical inventory last week, I was able to track down demand history for a couple of our items, and that is attached to this memo. Welcome to the job!”

Mike decided to investigate further. Although the records were indeed difficult to track down and compile, by the end of his second week, he had obtained a fairly good picture of the situation, based on the investigation of 100 parts selected at random. He learned, for example, that although there was an overage of over 70 days’ worth inventory (annual sales/average inventory), the fill rate for customer orders was less than 80%, meaning that only 80% of the items requested were in inventory; the remaining orders were backordered. Unfortunately, the majority of customers viewed services parts as generic and would take their business elsewhere when the parts were not available from Northcutt Bikes.

What really hurt was when those businesses sometimes canceled their entire order for parts and placed it with another supplied. The obvious conclusion was that while there was plenty of inventory overall, the timing and quantities were misplaced. Increasing the inventory did not appear to be the answer, not only because a large amount was already being held but also because the space in the warehouse (built less than two years ago) had increased from being 45% utilized just after they moved in to its present utilization of over 95%.

Mike decided to start his analysis and development of solutions on the two items for which Art had already provided demand history. He felt that if he could analyze and correct any problems with those two parts he could expand the analysis to most of the others. The two items on which he had history and concentrated his initial analysis were the FB378 Fender Brackets and the GS131 Sprocket. Northcutt purchases the FB378 from a Brazilian source. The lead time has remained constant at three weeks, and the estimated cost of a purchase order for these parts is given at $35 per order. Currently, Northcutt Bikes uses an order lot size of 120 for the FB378 and buy the items for $5 apiece.

The GS131 part, on the other hand, is a newer product only recently being offered. A machine shop in Nashville, TN produces the part of Northcutt Bikes, and it gives Northcutt Bikes a fairly reliable six-week lead time. The cost of placing an order with the machine shop is only about $15, and currently Northcutt Bikes orders 850 parts at a time. Northcutt Bike buys the item for $10.75

Following is the demand information that Art gave to Mike on his first day for the FB378 and the GS131:

Mike realized he also needed input from Ann about her perspective on the business. She indicated that she felts strongly that with better management, Northcutt Bikes should be able to use the existing warehouse for years to come, even with anticipated growth in business. Currently, however, she views the situation as a crisis because “we’re bursting the seams with inventory. It’s costing us a lot of profit, yet our service level is very poor, at less than 80%. I’d like to see us maintain a 95% or better service level without back orders, yet we need to be able to do that with a net reduction in total inventory. What do you think Mike? Can we do better?”

Questions

1. Use the available data to develop inventory policies (order quantities and reorder points) for the FB378 and GS131. Assume that the holding cost is 20% of unit price.

2. Compare the inventory costs associated with your suggested order quantities with those of the current order quantities. What can you conclude?

3. Do you think the lost customer sales should be included as a cost of Inventory? How would such an inclusion impact the ordering policies established in question 1?

FB378 GS131 Week Forecast Actual Demand Forecast Actual Demand 30 32 35 34 39 48 30 30 45 4 38 36 6 37 37 36 37 38 36 36 35 37 35 37 36 34 36 37 36 36 35 36 10 30 47 40 31 38 32 49 10 18 30 42 16 12 13 14 15 16 17 18 19 20 21 27 52 51 54 52 53 53 52 53 53 54 53 54 53 53 57 59 46 62 51 60 46 58 42 57 41 34 23 24 25 26 27 52 41 30 37 31 45

Explanation / Answer

1)

Inventory level during start of week for FB378 should be 50

Inventory level during start of week for GS131 should be 68

So reorder for FB378 product should be (50 - stock of FB378 at end of week)

Reorder for GS131 product should be (68 - stock of FB378 at end of week)

FB378 GS131 mean 37 47.6875 deviation 7.580339 12.37295 Inventory require for 95% delivery 49.46855 =50 68.03919=68

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