Q$6(4$ points$).$ Use the information provided in the Introduction

Several years ago, Jan Northcutt, owner of Northcutt Bikes,

recognized the need to organize a separate department to deal

with service parts for the bikes her company makes. Because

the competitive strength of her company was developed

around customer responsiveness and flexibility, she felt that

creating a separate department focused exclusively on aftermarket service was critical in meeting that mission.

When she established the department, she named Ann

Hill, one of her best clerical workers at the time, to establish

and manage the department. At first, the department occupied only a corner of the production warehouse, but now it has

grown to occupy its own $100,000-$square$-$foot warehouse. The

service business has also grown significantly, and it now represents over $15\%$ of the total revenue of Northcutt Bikes. The

exclusive mission of the service department is to provide parts

$($tires$,$ seats, chains, etc.$)$ to the many retail businesses that sell

and service Northcutt Bikes.

While Ann has turned out to be a very effective manager

$($and now holds the title of Director of Aftermarket Service$),$

she still lacks a basic understanding of materials management.

To help her develop a more effective materials management

program, she hired Mike Alexander, a recent graduate of an

outstanding 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 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 note 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 count of inventory last week. I was able to track down a 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 an investigation of $100$ parts selected

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 that only $80\%$ of the items requested were

in inventory; the remaining orders were backordered. Unfortunately, the majority of customers viewed service parts as

generic and would take their business elsewhere when 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

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 space in the warehouse $($built less

than two years ago$)$ had increased from being $45\%$ utilized just

after it 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 FB$378$

Fender Bracket and the GS$131$ Gear Sprocket. Northcutt Bikes

purchases the FB$378$ 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

FB$378$ and buys the items for $$5$ apiece.

The GS$131$ part, on the other hand, is a newer product

only recently being offered. A machine shop in Nashville,

Tennessee, produces the part for 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 Bikes buys the item for $$10\mathrm{.}75.$