230 PART II Tools and Tactical Issues CASE STUDY Dano's Drugstore IV busy street co M argaret Dano opened her drugstore in 1951 on a Her drugstore in 1951 on a y street corner in a small suburb of Chicago Originally, the store provided drugs and various other Small items primarily to residents of the town Over clades, the store expanded as the sub urbs of Chicago expanded. By 1996, the store had tripled from its original size, occupying 5,000 square feet of space. In the course of this expansion, the store increased its product range, so that in addition to the pharmacy, it offered other items such as snack food, dental care items, suntan lotion, and bug spray. The total breadth of the product line encompassed more than 10,000 items. As the drugstore grew, managing inventory rere sented a significant challenge. Margaret has tried numerous systems over the past few years, but most of these have not been very successful. The average item has 75 days' worth of inventory, yet the fill rate of all customer orders is approximately 90 percent. Any item that is out of stock will be backordered (with a rain check provided) upon customer request. In approximately 50 percent of the cases where an item is out of stock, the customer simply buys the item from a competing drugstore. Margaret realizes that the current inventory methods are not working well. In addition, she realizes that her background as a pharmacist may not have properly prepared her for managing the inventory for thousands of items. Fur- thermore, Margaret would like to take a less active role in her business and spend her winters in Florida. Therefore, she has hired you as a consultant to evalu- ate and improve the inventory methods for Dano's. Dano's Drugstore is currently affiliated with a major national drugstore chain that supplies all of the items that Dano's sells. Supplies are delivered weekly in a single shipment on Wednesday afternoon. Dano's must finalize its order by 9:00 a.m. Tuesday morning. The warehouse/service center that Danos Drugstor The Warehouse/S orders from has close to a 100 percen t ate, there fore, it is safe to safe to assume that any orders placed on . Theday morning will be delivered on Wednesday afternoon. Your initial assignment is to develop an inventory system for three items: (1) Tylenol aspire caplets, (2) Milky Way candy bars, and (3) Raid rat poison. Demand data for the previous year for each these three products is given in Exhibits 1 through 2 The three products sell for $5.99 (Tylenol), 30.75 (Milky Way), and $9.99 (Raid). The profit margins on the three products are 30 percent, 40 percent, and 20 percent, respectively. The cost of placing any order. including stocking the order in the storeroom and on the store's display shelves, is estimated to be $3. Dano's Drugstore has averaged a 15 percent an- nual return on assets over the past four years. Marga- ret has a revolving line of credit at the local bank that allows Dano's to borrow money at 10 percent. Cur- rently, the drugstore has a loan in the amount of $145,000 outstanding. Annual rent for the store is $84,000, insurance is $24,000 per year, and mainte- nance expenses are approximately $20,000. The current order policies for each of the three "test" units are as follows: Tylenol Caplets Raid Rat Milky Way Q = 200 Q = 600 Order 100 if inventory 50, order forecast number for next week CUPTER 6 Independent Demand inventory EXHIBIT 1 Tylenol Aspirin Caplats-Demand for Past War Actual 99899 2 1 8 PART EXHIBIT 2 Milky Way Candy Bars-Demand for Past Year Week Week Actual Demand Week Week Demand Tools and Tactical issues 120 159 165 168 129 152 133 150 148 159 146 167 163 (continued) 232 PART II Tools and Tactical Issues asted versus Actual Demand for Past Year Actual 40 EXHIBIT 3 Raid Rat Spray-Forecasted versus Actual Demand Fore- casted Fore- Fore- Fore- Actual casted Actual casted Actual casted d Week Demand Demand Week Demand Demand Week Demand Demand Week Demand Demand 500 630 14 10 14 33 12 27 41 630 10 12 15 480 12 18 28 17 22 12 25 16 18 15 29 22 25 18 17 15 8 30 30 19 18 16 18 8 22 31 19 22 11 19 25 32 22 45 15 22 9 22 20 25 14 33 11 17 22 24 21 14 21 34 17 25 47 17 9 24 17 22 21 17 35 25 19 48 22 10 17 14 23 17 8 36 19 44 49 26 33 11 14 27 24 8 7 37 44 95 50 33 15 12 27 28 25 7 44 33 95 220 51 15 14 13 28 33 26 44 33 39 220 500 52 14 17 aw QUESTIONS 1. What factors should be considered when develop- ing inventory systems for the 10,000 items car- ried by Dano's? What are the key differences between items that would affect how their inven- tory is managed? For example, how should pre- scription drugs be handled differently from over-the-counter items? Or how do seasonal products differ from more stable products? 2. Develop an inventory system for Tylenol caplets and for Milky Way candy bars. Hint: You will need to choose an appropriate cycle-service level and an appropriate holding cost for each item. 3. Discuss the characteristics of Raid rat spray that might suggest that it should have a different type of inventory system. What factors should be con- sidered in developing a system for Raid? 4. Compare the annual costs for your plan for Tyle- nol and Milky Way relative to the costs under the current plan. You may want to consider ordering holding, and stockout costs