Case study 11.1: Carls Computers (All 4 Questions)

Using the data on the two part numbers given, provide a comprehensive evaluation of the ordering policies. Compare the present annual average cost with the cost of using a system such as EOQ & discuss and other order policies (as appropriate). 100-250 words (no citation)

Should Carl pursue the price break? Why or why not? 100-250 words (no citation)

What do you think the sources of the problems are? Be specific and show your analysis. 100-250 words (no citation)

Develop a comprehensive plan to help Rosa get the inventory back under control. 100-250 words (no citation)

11.1 Carl's Computers There was no question about Carl's genius. Seven years ago he decided to enter business had become. Although on the Thersonal computius came in the unique competitive nightmare that the personal conpulike move, the genius came in the unique surface that appeared to be a rather non-o fis computer. He arket. Other computer makers also designs and features that he developecal and regional mational competitors, and the delivery delivery in only two days for the local and but they were national compete them on delivery. had rapid production and delivery, buly made Carl able to outcompe the many small businesses in time from distant locations gencrally. especially amoug bollowing. he also had very rapid service to deal Carl soon had a loyal following. quickly, but he alse critical for the local businesses the area. Not only could Carl deliver quice feature became servid soon that rapid service capability whose very livelihood depended on the computers, and soon Since most of these businesses became more important than the initial product delivery. Sinc own in-house computer experts, so were fairly small, they could no The Current Situation All was not totally rosy at Carl's Computers, however. Recently they had hired Rosa Chang for the newly developed position of inventory manager for aftermarket service. In the first week Rosa got a good idea of the challenges facing her after she interviewed several of the people at Carl's. RANDY SMITH, CUSTOMER SERVICE MANAGER: "I'm not sure what you need to do, but whatever it is needs to be done fast! At this point our main competitive edge other than product delivery is service response, and I' m always hearing that we can't get a unit in the field serviced because some critical part is missing. Both the customers and the field service people are complaining about it. They make a service call, find out they need a certain part, but in many cases we're out of the part. The customers tend to be fairly loyal, but their patience is wearing thin-our policy is to provide at least a 98% customer service level, and we're not even close. That's not the only problem, though. Since our service is declining, the customers are looking more closely at our prices. I'd like to cut them a break, but our financial people tell us our margins are already too thin, and get this-one major reason is that our inventory and associated inventory costs are too high! It looks to me as if we have a very large amount of the wrong stuff here. I don't know that for sure, but I sure hope you can find a solution, and fast! ELLEN BEDROSIAN, CHIEF ENGINEER: "Boy, am I glad you're here! The inventory problems are killing us in engineering. Carl's has always been known for unique designs, and we've been trying hard to keep ahead of the competitive curve on that issue. The problem is that most of the time when we push hard to get a new design out, the inventory and financial people tell us we have to wait. It seems like they always have too much of the old design inventory around, and the financial 'hit' to make it immediately obsolete would be too severe. We're told that as soon as we announce a new design, many of our customers would want it, so that tends to make most existing old design material-even for serviceobsolete. We try to tell the service inventory people when we have a new design coming so they can use up the old material, but somehow it never seems to work out." JM HUGHES, PURCHASING MANAGER: "Well, Rosa, I wish you luck-you'll need it. I'm getting pressure from so many directions, sometimes I don't know how to respond. First, the financial people are always telling me to cut or control costs. The engineers then are always coming out with new designs, most of which reprent purchased parts. A lot of our time is spent working with suppliers of the new deaigns, while trying to get theon to have very rapid delivery with low prices. Alhough most can live with that, where we really jerk: them around is with the changes in orders. One minube our flell service people tell us they've run oot of womething abd they aeed delivery io mediately. In many cases they doa't even have an order for that part on the books. The next thing you krow they want us to cancel an order for sornething that only a day before they said was critical. Our bey uns and supptiers are good, bot they're sot miracle workers aod they can't do everything at oose. Some of our suppliers are even threateaing to refuse our busiecss if we doe't get our act together. We've tried to offer soletions for the field service people, but nothisg seems to work. Maybe they Mary shoutroN, culy mivancut onstcre: -if you can help us with this invenjust don't care." tory problem, you'tl be well woeth your salary. and then sompel Here we are being competitively crunched for price, delivery, and efficient service, and our service inveotery costs seem to have gone completely out of control. The cotal inventory has climbed coces than 200 of in the last two years, while our service revenacs have only grown 15%. Oa top of that, we have had an increase in obcolete material write-off of 80% in in that same two-year period. In addition. sigaificent iaventory-related costs have come from expediting. Preminm freight shipmeots, such as flying in parts, caused by critical part shoctages cost us over $67,000 last year abone. Do you realire that ropresents almost 20 of of our gross profit margin from the service basiness? With our interest rates, warehousing. and obvolete inveatory costs, we recognize a 23% inventory holding cost. Given our boge inventory level, that wakes anothse big bite out of profits. All this sug. gests to me we need to get coetrol of the situation or we may find ourselves out of busincss? FRANKI.IN KNOWLIS, FIEID srgviCE sUrexvIsok: "Uatil they hired yoo, the other production supervisor and I had been in charge of inveatory. I hate to discourage you, bat it looks tike an impossible job. The purchasing poople bought a bunch of standard-sire bins, and they told ws that as soon as we had a week" s average part usage for each peart, we should order more-specifically, "enough to fill up the bin." Since most of their lead times were a week or less, it sure made sense. All the records were kept on compuser. therefore the computer conald be programmed to sell us when we had only the weck"'s supply. It made great sense to me, but something kept going wrong. First, field service technicians seemed to frequently grab parts without flling out a transaction. That made our records go to pot. As a matter of fact, we had a complese physical inventory a couple of months ago, and it showed our records to be less then 30 se accurate! I suspect our records are almost that bud again, and we don't have another physical inveatory scheduled for another nine months. "Second, with our records so bad, the field service technicians can never tell if we really have the parts or not. Several of them have started to take large quantities of critical parts and are keeping their own inventory. When it comes time to replace their own "private stock," they take a bunch more. That has made the demand on the central inventory appear very erratic. One day we have plenty, and the next day we're out! Yoa can imagine how happy purchasing is when the first time they see a purchase order that is requesting an immediate urgent shipment. We've made a policy that the techniclans are only supposed to have a few specifically authorized parts with them, but 1m sure many of the technicians are violating that policy big time." QUENTN BATRS, FIEtD sERVICE. TICINw aN: "Something is drastically wrong with our inventory, and it's driving me and the other techs crazy. We're not supposed to keep much inventory with us, only a few conmonly used parts. If we have a field problem requiring a part, We"re smppowed to be getting it from the central inventory. Problem is, much of the timk" it " not there. We have to take time to pressure purchasing for it, and then have to try to salm our customers while we wait for delivery. In the meantime, the custowers" syatcms are often unusable and they're losing business. It doesn't take too long before they're really mad at us. I guess the people at purchasing don't care, since we have to take all the heat. Lately, I've been taking and keeping a bunch of parts I'm not really supposed to have in my inventory, and I know the other field technicians do as well. That's saved us a few times, but the situation seems to be getting worse." Now that Rosa had some real information as to the nature of the problems, she needed to start developing solutions-and it appeared that it was important to come up with good solutions fast! The first thing she tried to do was take a couple of part numbers at random and see if she could improve on the ordering approach. The first number she selected was the A233 circuit board. The average weekly usage was 32 . The lead time was given as one week. The board cost $18, and the cost to place an order was given as $16. The quantity ordered to fill the bin was usually 64 . The second number was the P656 power supply. It cost $35, but since the supplier only required a fax to order the cost was only $2 per order. Even with the fax, the delivery lead time was two weeks. The average weekly demand for the power supply was 120 . The company typically ordered 350 units at a time. Recently, the supplier for the circuit board hinted that it might be able to give Carl's a price break of $2 per board if Carl's would order 200 or more at a time. Assignment 1. Using the data on the two part numbers given, provide a comprehensive evaluation of the ordering policies. Compare the present annual average cost with the cost of using a system such as EOQ, and discuss any other order policies as appropriate. 2. Should Carl's pursue the price break? Why or why not? 3. What do you think the sources of the other problems are? Be specific and analyze as completely as possible. 4. Develop a comprehensive plan to help Rosa get the inventory back under control