Franklin Fan Company is a manufacturer and distributor of electric fans founded by two disenchanted engineers, Dan Block and Ed Spriggs, one an electrical engineer, and the other a mechanical engineer. Originally located in Block's garage, the firm showed slow but steady growth for seven years before it relocated to an old, abandoned meat-packing warehouse on Chicago's South Side. With increased space for inventory storage and manufacturing, the company was able to begin offering an expanded line of fans. This increased selection, combined with the trend for ceiling fans, led to an explosive growth of the business. Fifteen years later, Franklin Fan was the largest independent manufacturer and distributor of fans in the north central region.
Recently, Franklin Fan relocated to a sparkling new office, warehouse, and manufacturing complex off Interstate 55 in suburban Chicago. The warehouse space alone occupies more than 100,000 square feet. Although only a handful of new products have been introduced since the warehouse was constructed, the warehouse utilization increased from 65% to more than 90% capacity. During this same time period, however, sales growth stagnated. These conditions motivated Block and Spriggs to hire the first manager from outside the company in the firm's history.
It is June 6, Sue McCaskey's first day in the newly created position of Materials Manager for Franklin Fan. A recent graduate of a prominent business school, McCaskey is eagerly awaiting her first real-world problem. At approximately 8:30 AM, this problem arrives in the form of status reports on inventory and orders shipped. At the top of the extensive computer printout is a handwritten note from Joe Donnell, the Purchasing Manager: "Attached you will find the inventory and customer service performance data. Rest assured that the individual inventory levels are accurate because we took a complete physical inventory count at the end of last week during a weekend shutdown. Unfortunately, we do not keep compiled records in some areas as you requested. However, you are welcome to do so yourself. Welcome aboard!"
A little upset that aggregate information is not available, McCaskey decides to randomly select a small sample of approximately 100 items and compile inventory and customer service characteristics to get a feel for the "total picture." The results of this experiment reveal to her why Franklin Fan decided to create the position she now fills. It seems the inventory is in all the wrong places. Although an average of approximately 60 days of inventory is on hand, the firm's customer service level is inadequate. Franklin Fan tries to backorder the customer orders not immediately filled from stock, but some 10% of demand is being lost to competing companies.
Derived from the Parts Emporium Case; Chapter 9; Page 343; Operations Management by Krajewski, Ritzman, & Malhotra (10th) 2013 Page 2
Because stockouts are costly, relative to inventory holding costs, McCaskey believes that a cycle-service level of at least 95% should be achieved. McCaskey knows that although her influence to initiate changes will be limited, she must produce positive results immediately. Thus, she decides to concentrate on two products from the extensive product line: the CF151 ceiling fan and the PF032 personal fan. If she can demonstrate significant gains from proper inventory management for just two products, perhaps Block and Spriggs will give her the backing needed to change the total inventory management system.
The CF151 is manufactured in house. Actual demand for the last 21 weeks of this year is shown in the following table.
A quick review of past orders, shown in another document, indicates a lot size of 2,000 units is being used and that the lead time is fairly constant at two weeks. Currently, at the end of week 52, no inventory is on hand, 102 fans are backordered, and the company is awaiting a scheduled receipt of 2,000 fans.
The PF032 personal fan is also produced in house. Actual demand so far this year is shown in the following table.
Derived from the Parts Emporium Case; Chapter 9; Page 343; Operations Management by Krajewski, Ritzman, & Malhotra (10th) 2013 Page 3 Because the product is new, data are available only since its introduction in week 42. Currently 2,243 personal fans are on hand, with no backorders and no scheduled receipts. A lot size of 15,000 personal fans is being used, with the lead time fairly constant at three weeks.
The wholesale prices that Franklin Fan charges its customer are $129.99 for the ceiling fan and $19.99 for the personal fan. Because no quantity discounts are offered on these two highly profitable items, gross margins based on current purchasing practices are 32% of the wholesale price for the ceiling fan and 48% of the wholesale price for the personal fan. Franklin Fan estimates its cost to hold inventory at 21% of the inventory investment. This percentage recognizes the opportunity cost of tying money up in inventory and the variable costs of taxes, insurance, and shrinkage. The annual report notes other warehousing expenditures for utilities, maintenance, and debt service on the 100,000 square foot warehouse, which was built for $1.5 million. However, McCaskey reasons that the warehousing costs can be ignored because they will not change for the range of inventory policies she is considering. Out-of-pocket costs for Franklin Fan to place an order for production are estimated to be $30.00 per order for all fans. On the outbound side the company can charge a delivery fee. Although most customers pick up their items at Franklin Fan, some orders are delivered to customers. To provide this service, Franklin Fan contracts with a local company for a flat fee of $50.00 per order which is added to the customer's bill. McCaskey is unsure whether to increase the ordering costs for Franklin Fan to include delivery charges.
QUESTIONS
1. Put yourself in Sue McCaskey's position and prepare a detailed report to Dan Block and Ed Spriggs on managing the inventory of the CF151 ceiling fan and the PF032 personal fan. Be sure to present a proper inventory system and recognize all relevant costs.
2. By how much do your recommendations for these two items reduce annual cycle inventory, stockout, and ordering costs?