Proposed Solution methodology (EXCEL work)

CASE STUDY NORTHCUTT BIKES: THE SERVICE DEPARTMENT Introduction Several years ago, Jan Northcutt, wner of Northcut Bikes recognized the need to organize a separate department to deal with service parts for the bikes her company made. Because the competitive strength of her company was devel oped around customer responsiveness and flexibility, she felt a separate department focused exclusively on aftermarket service was critical in meeting that mision When she established the department, she named Amn Hill, one of her best clerical workers at the time, to establish and manage the department. At first, it occupied only a cor ner of the production warehouse, but now it has grown to occupy its own 100.000-square-foot warehouse. The Vic business has also grown significantly, in that it now repe sents over 15% of the total revenue of Northcutt Bikes The exclusive mission of the service department is to provide parts tines, cats, chains, etc.) to the many retail businesses that sell and service Northcott Bikes While Ann has turned out to be a very effective manager (and now has the title of Director of Aftermarket Service), she still lacks a basic understanding of materials management. To help her develop a more effective material management pro gram, she hired Mike Alexander, a recent graduate of an out standing business management program at North Carolina State University, to fill the newly created position of Materials Manager of Aftermarket Service The Current Situation During the interview price, Mike got the impressoon that there was a lot of opptattity for improvement. It was only after he selected his starting care and requested some infor mation 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 fol lowing note was on his desk the first day from the warchouse supervisi, Art Demming We could not complete Pisory you pustol, as we Love chombi Theresa studierte padowe it all. Reto hower that we think they profile and we jest to our pool oy lestk. mable to track down a demand foster for at of curtos slut is as folher Wome tel When Mike karned this, he decided to investigate for ther. Although the records were indeed difficult to track 472 PAST IV Manning and Controlling Operations and Supply Chains WEEK ACTUAL ACTUAL FORECAST DEMAND, FORECAST. DEMAND, F8378 GSISI GS11 35 7 5 26 15 35 37 36 37 0 31 10 13 30 10 11 12 13 14 15 16 12 36 36 35 55 50 51 H 19 24 35 53 46 19 21 down and compile, by the end of his second week he had obtained a fairly good picture of the situation based on an investigation of 100 parts sclected at random. He learned, for example, that although there was an average of over 70 days worth of inventory annual sales/average inventory), the fill rate for customer orders was less than 80%, meaning only 80% of the items requested were in inventory. The remain ing orders were backordered. Unfortunately, many cus- tomers viewed many service parts as generic and would take their business clsewhere when parts were not available from Northcutt Bike What really hurt was when those businesses sometimes canceled their entire order for parts and placed it with another parts supplier. 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 warehouse space built less than two years ago) had increased from being 45% utilized just after the company moved in to its present uti- lization of over 95% Mike decided to start his analysis and development of solutions on the two items for which Art had already pro vided a demand history. He felt that if he could analyse 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 Beacket and the GS131 Gear Sprocket. The FR378 is purchased by Northcutt Bikes from a Brasilian source. The load 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 use an order lot size of 120 for the FB378 and buys the items for $5.00 piece. The GS13 part, on the other hand, is a newer product only recently being offered. It is produced for Northcutt Bikes by a machine shop in Nashville, Tennessee, which gives Northcuttes 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 at a time. Northcutt Bikes buys the item for $10.75 Following is the demand information that Art had given to Mike on his first day for the F8378 and the GSA3: 36 34 36 37 36 36 20 52 41 30 50 53 16 S5 31 45 53 54 50 53 57 27 36 Mike realised he also needed input from Annas to her per pective on the business. She indicated that she felt strongly that with better management they should be able to use the existing warchouse for years to come even with the antici pated growth in business Carrently, however, the view the situation as a crisis because we're busting at the same with inventory. It's costing us a lot of profit, yet our service level is very poor at less than 80. like to see us maintain 95% or better service level without backorders, 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? WEEK ACTUAL ACTUAL FORECAST DEMAND, FORECAST DEMAND, F3378 7378 G5131 GSISI 30 34 32 35 QUESTIONS 1. Use the available data to develop inventory policies (order quantities and reorder points for the FB378 and GS131. Asume holding cost is 20% of unit price 2. Compare the inventory costs mocated with your gested order quantities with those of the current order quantities. What can you conclude! 3. Do you think the lost customer sales should be included a cost of inventory? How would such an inclusion impact the ordering policies you established in