MAGT 304 Case Study - NORTHCUTTBIKES (Spring2014)

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Production�and�Operations�Management� MAGT304�20822ͲL01,�20860ͲL51�and�22923ͲL52�Spring�2014�

Case�Study�

NORTHCUTT�BIKES:�THE�SERVICE�DEPARTMENT�

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�afterͲmarket�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�100,000ͲsquareͲfoot�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�

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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�they�moved� in�to�its�present�utilization�of�over�95%.�

Week�

FB378� � GS131�

Forecast� Actual�� Demand � Forecast�

Actual�� Demand

1� 30� 30� � � � 2� 30� 40� � � � 3� 33� 31� � � � 4� 32� 36� � � � 5� 33� 46� � � � 6� 37� 26� � � � 7� 34� 22� � � � 8� 30� 43� � � � 9� 34� 30� � � � 10� 33� 28� � � � 11� 32� 45� � 10� 15� 12� 36� 39� � 12� 25� 13� 37� 30� � 16� 31� 14� 35� 34� � 21� 51� 15� 35� 29� � 30� 49� 16� 33� 48� � 36� 42� 17� 38� 23� � 38� 52� 18� 34� 38� � 42� 57� 19� 35� 32� � 47� 42� 20� 34� 23� � 46� 60� 21� 31� 49� � 50� 50� 22� 36� 37� � 50� 58� 23� 36� 27� � 52� 45� 24� 33� 34� � 50� 54� 25� 33� 31� � 51� 38� 26� 32� 43� � 47� 57� 27� 35� � � 50� �

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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�FB378�Fender�Bracket�and�the�GS131�Gear�Sprocket.� Northcutt�Bikes�purchases�the�FB378�from�a�Brazilian�source.�The�lead�time�has�remained�constant,�at� four�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�FB378�and�buys�the�items�for�$5�apiece.�

The�GS131�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� sixͲweek�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�$10.75.�

The�table�above�provides�the�demand�information�that�Art�gave�to�Mike�on�his�first�day�for�the�FB378� and�the�GS131.�Mike�realized�he�also�needed�input�from�Ann�about�her�perspective�on�the�business.�She� indicated�that�she�felt�strongly�that�with�better�management,�Northcutt�Bikes�should�be�able�to�use�the� existing�warehouse�for�years�to�come,�even�with�the�anticipated�growth�in�business.�Currently,�however,� she�views�the�situation�as�a�crisis�because�“we’re�bursting�at�the�seams�with�inventory.�It’s�costing�us�a� lot�of�profit,�yet�our�service�level�is�very�poor,�at�less�than�80%.�I’d�like�to�see�us�maintain�a�95%�or� better�service�level�without�back�orders,�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?”�

Questions�(1�point�for�each�question)�

All�the�questions�below�are�concerned�with�the�product�FB378�(Fender�Bracket).�The�holding�cost�is� assumed�to�be�20%�of�unit�price�and�the�year�is�assumed�to�include�52�working�weeks.�

1. Demand�forecasts:� a. Verify�that�the�company�is�using�an�exponential�smoothing�model�with¦�equal�to�0.3.�� b. Would�a�linear�regression�model�provide�better�results?�

2. Calculations:�

a. What�is�d ?� b. What�is� dV �?�

c. What�is�L?� d. What�is� LV ?� e. What�are�H,�S�and�D?�

3. Current�inventory�control�system:� a. How�can�you�deduce�that�the�company�is�using�a�continuous�review�system?�� b. How�much�are�they�ordering?�� c. When�are�they�ordering?� d. What�is�the�annual�inventory�(holding�and�ordering)�cost�of�this�policy?�

4. Proposed�inventory�policy�based�on�the�continuous�review�system:�

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a. How�much�should�they�order?�� b. When�should�they�order?� c. �What�is�the�annual�inventory�(holding�and�ordering)�cost�of�this�policy?�

5. Proposed�inventory�policy�based�on�the�periodic�review�system:� a. Show�that�the�reorder�period�(for�a�periodic�review�system)�is�10�weeks�when�obtained�

from�the�economic�order�quantity�(rounded�to�the�nearest�number).� b. When�should�they�order?� c. How�much�should�they�order?�� d. What�is�the�annual�inventory�(holding�and�ordering)�cost�of�this�policy?�

6. Next�step:� a. What�should�Mike�do�next?�� b. How�can�IT�help�him�solve�the�problem�of�the�company?�

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