Case study Carls ComputersThere was no question about Calrs genius. Seven years ago he decided to enter the competitive nightmare that the personal computer business had become. While on the surface appeared to be rathera non-genius-like move, the geniuscame in the unique designs and features that he developed for his computer. He also figured a way to promisedelivery in only two days for the local and regional market.Other computer makers also had rapid productionand delivery, but they were nationalcompetitors and the delivery from distant locations generally made Cal able to out-compete them on delivery.Carl soon had a loyal following, especiallyamong the many small businesses in the area. Not only could Carl deliver quickly, but he also had very rapid service to deal with any technical problems. That service feature became critical for the local businesses whose very likelihood depended on the computers, and soon the rapid service capability became more important than the initial product delivery. Since most of these businesses were fairly small, they could not afford to have their own in-house computer experts, thereforethey depended heavily on Carl. The current situationAll was not totally rosy at Carls Computers, however. Recently they had hired Rosa Change 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 Carls.Randy Smith, Customer Service Manager, Im 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 productdelivery is service response, and Im always hearingthat we cant get a unit in the field serviced becausesome critical part is missing. Both the costumers 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,were out of that 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 were not even close. Thats not the only problem, though. Since our service is declining, the customers are looking more closely at our prices. Id 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 thatour 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 dontknow that for sure, I sure hope you can find a solution, and fast!Ellen Bedrosian, Chief Engineer, Boy, am I glad youre here! The inventory problems are killing us in engineering. Carls has always been known for unique designs, and weve been trying hard to keep ahead ofthe competitive curve on thatissue. The problem is that most of the time when we pushhard to get a newdesign 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 hitto make it immediately obsolete would be too severe. Were told that as son 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 service obsolete.We try to tell

the service inventory people when we have a new designcoming so they can use up the old material, but somehow it never seems to work out.Jim Hughes, PurchasingManager, Well, Rosa, I wish you luck youll need it. Im getting pressure from so many directions sometimes I dont 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 ofwhich represent purchased parts. A lot of our time is spent working with suppliers on the new designs, while trying to get them to have very rapid delivery with low prices. While most can live with that, wherewe really jerk them around is with the changesin orders. One minute our field service people tellus theyve run out of something and they need delivery immediately. In many cases they dont even have an order for that part on the books. The next thing you know they want us to cancel an order for something that only a day before they said was critical. Our buyers and suppliers are good, but theyre notmiracle workers andthey cant do everything at once. Some of our suppliers are even threatening to refuse our business if we dontget our act together. Weve tried to offer solutions for the field service people,but nothing seems to work. Maybe they just dont care.Mary Shoulton, Chief Financial Officer, If you can help us with this inventory problem youll be well worth your salary, and then some! Here we are being competitively crunched for price, delivery, and efficient service and our service inventory costs seem to havegone completely out of control. The total inventory has climbed more than200% in the last two years while our service revenues have only grown 15%. On top of that, we have had an increase in obsolete material write-off of 80% in that same two-year period. In addition, significant inventory-related costs have come from expediting. Premium freight shipments, suchasflying in parts, caused by critical part shortages cost us over $67,000 last year alone. Do you realize that represents almost 20% of our gross profit margin from the service business? With our interest rates, warehousing, and obsolete inventory costs, we recognize a 23% inventoryholding cost. Given our huge inventory level, that takes another big bite out of profits. All this suggests to me we need to get control of the situation or we may find ourselves out of business!Franklin Knowles, Field Service Supervisor, Until they hired you, the other production supervisor and I had been in charge of the inventory. I hate to discourage you, but it looks like an impossible job. The purchasing people bought a bunch of standard-size bins, and they told us that as soon as we had a weeks average part usage for each part to order more specifically, enough to fill up the bin. Since most of their lead time were a week or less, it sure made sense. All the records were kept on computer;therefore the computer could be programmed to tell us when we had only the weeks supply.It made great sense to me, but something kept going wrong. First, field service technicians seemed to frequently grab parts without filling out a transaction. That made our records go to pot. As a matter of fact, we hada complete physical inventory a couple of months ago, and it showed our records to be less than 30% accurate! I suspect our records are almost that bad again, and we dont have another physical inventoryscheduled for nine months. Second, with our records so bad the field service technicians can never tell if we really have parts or not. Several of them have started to take large quantities of critical parts and keeping their own inventory. When it comes time toreplace their own private stock,

they take a bunch more. That has made the demand on the central inventoryappear very erratic. One day we have plenty, and the next day were out! You can imagine how happy purchasing is when the first time they see a purchasing order it is requesting an immediate urgent shipping. Weve made a policy that the technicians are only supposed to have a few specifically authorized parts with them, but Im sure many of the technicians are violating that policy big-time.Quentin Bates, Field Service Technician, Something is drastically wrong with our inventory, and its driving me and the other techscrazy. Were not supposed to keep much inventory with us, only a fewcommonly used parts. If we have a field problem requiringa part, were supposed to be getting it from the central inventory. Problem is, mucho of the time its not there. We have to take time to pressure purchasing for it, and then have to try to calm our customers while we wait for delivery. In the meantime, the customerssystems are often unusable, and theyre losing business. It doesnttake too long before theyre really mad at us. I guess the people at purchasing dontcare, since we have to take all the heat. Lately Ive been takingand keeping a bunch of parts Im not really supposed to have in my inventory, and I know the other field technicians do also. Thats saved us a few times, but the situation seems to be getting worse.Now that Rosa had some sense 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 random and see if she could improve on the ordering approach. The first number selected was the A233 circuit board. The average weekly usage was 32, with a standard deviationof 47. The lead time was given as one week. The board costs $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 requireda fax to order the cost was only $2 per order. Even with the fax delivery lead time was two weeks. The average weekly demand for the power supply was 120 with a standard deviation of 14 units. They typically ordered 350 units at a time. Recently, the supplier for the circuit board hinted that they might be able to give Carls a price break of $2 per board if Carl would order 200 or more at a time.Case analysis

1.Using the data on the two part numbers given, provide a comprehensive evaluation of their ordering policies. Compare the present annual average cost with the cost of using a system such as EOQ, and discuss any other ordering policies as appropriate.

2.Should Carls pursue the price break? Why or why not?

3.What do you think the sources of theother problems are? Be specific and analyze as completely as possible.

4.Develop a comprehensive plan to help Rosa put inventory back in control.

5.Investigate what other tech companies or similar companies do regardinginventory management and conclude whether Carls could adopt/adapt other policies.