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Inventory Management

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Drake Radio
Drake Radio got its start during World War I by manufacturing radio communications equipment for the military. By the start of World War II, Drake was one of the largest suppliers of military communications equipment. After World War II, Drake diversified into the following three market areas:

Military communications equipment
Amateur radio equipment
CB radios and equipment
Using its technology and experience gained from manufacturing military communications equipment, Drake became known as one of the best producers of amateur radio equipment. Drake especially excelled with its single sideband radios and its two-meter radios for amateur use. Although these radios were expensive, they were of the finest quality and always in demand.

In developing CB radios, however, Drake decided to mass produce cheap units that would have a wide appeal and a low price.

To help protect its good name in military communications equipment and amateur (ham) radios, these inexpensive CB radios were marketed under the brand name of Hustler.

In 1975, George Populas, the president of Drake Electronics, decided to investigate the possibilities of entering into the market of home stereo systems. These stereo systems would be high quality, highly priced, and marketed with the Drake name.

The most remarkable stereo system that Drake manufactured was the DR-2000, which was a sophisticated stereo receiver. The demand for the DR-2000 was fairly constant from month to month. (See Figure C12.1)

Demand for DR-2000s in units:
-January: 801
-February: 807
-March: 795
-April: 797

The DR-2000 had all the features of a stereo receiver that carried a price tag of $765. Some of these features included the ability to connect four different speaker systems, loudness control, flatness control, blend control, and complete digital read out. Of course, it could be connected to one or more receivers, tape units, turntables, and so on. Instead of having a bass control to regulate the low frequencies and a treble control to regulate the high frequencies, the DR-2000 had five separate controls that regulated five frequency ranges. One control regulated frequencies from 0 to 500 Hz; another control regulated frequencies from 500 to 5,000 Hz; a third regulated the frequencies between 5,000 to 10,000 Hz; a fourth regulated frequencies between 10,000 to 15,000 Hz; and a fifth, the frequencies between 15,000 and 50,000 Hz.

One of the biggest selling features of the DR-2000 was its ability to use the DR-2000 RC, the remote control device for the stereo receiver. Because all of the switching and components were solid state, the engineers of Drake Electronics were able to develop a complete remote control station that was no bigger than a cigarette pack. The basic idea for the remote control device was borrowed from that of television, and Drake engineers were able to control all functions by the DR-2000 RC. Each remote control box cost $75, and many people purchased more than one unit. The ability to control the stereo system from literally anywhere in a house was one of the system's biggest selling features, but it also caused some problems in homes with children. As a result, Drake developed a master control unit that parents could keep and that would override all other remote control units and the controls on the stereo receiver.

Another outstanding feature of the DR-2000 was its completely modular design, shown in Figure C12.2. Each module was contained in a completely separate, color coded box. By unlatching four hidden slides, the top of the cabinet could be removed, giving access to all of the modules.

The control module contained a microprocessor chip that monitored the operations of all of the other modules. If one of the modules stopped functioning correctly, the control module would activate a warning light on the front panel that indicated which module was not working properly. The owner could pull out the appropriate module and replace it with a new module from a nearby Drake dealership. If a Drake dealership was not close, Drake promised two-day, COD delivery. The malfunctioning module could even be sent to Drake or given to a Drake dealership to be repaired or for a refund.

All of the modules, except the FM tuner, were manufactured by Drake and stored until they were needed. Annual carrying cost was estimated to be 25 percent for all modules. The FM tuner modules were supplied by Collins Electronics, which also adjusted and sealed them. The cost to place an order was estimated at $50 per order, and the time to receive an order from Collins was approximately two weeks. Collins also offered quantity discounts on its FM tuners. (See Table C12.1).

Nitobitso Electronics also manufactured FM tuners compatible with the DR-2000. Because of its location in Japan, the time to receive an order was about two months, and the ordering cost was $100 because of the additional required paperwork. (See table C12.2.)

TABLE C12.1 Quantity discount from Collins on FM tuners Quantity Price
0-100 $25
101-500 24
501 and over 22

TABLE C12.2 Quantity discount from Nitobitso on FM tuners Quantity Price
0-100 $25
201-800 23
801-2,000 22
2,001 or more 21

Questions:

1. Compute the reorder point from Collins Electronics using a 97.5% service level.

2. What is the safety stock associated with your answer in question 1?

3. Compute the reorder point from Nitobitso Electronics using a 97.5% service level.

4. What is the safety stock associated with the answer in question 3?

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Solution contains calculation of reorder point and safety stock .

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Supply Chain Management Exercise Question

Supply Chain Management exercise questions

1. Mike Johnson went back to work in his family business after graduating. The family business, Johnson Bicycles, is a bike shop that specializes in high quality bikes. They carried a full line of bikes, ranging from touring bikes to mountain bikes and aimed to be the premiere, full service bike shop.

Currently, Johnson Bicycles has three retail outlets that it stocks individually (and hence manages inventory separately for each location). Mike thinks that the operation is big enough to take advantage of scale economies and wants to investigate the possibility of consolidating inventory at a centralized distribution point. Mike thinks that centralizing inventory should lead to a substantial reduction in inventory costs.

The basic idea would be to stock the bikes centrally (excluding the token display model) and expedite delivery to the stores on an as needed basis. He figured if the principal of aggregation would work for the series 200 bike, then it should provide costs savings for all styles of bikes. Table 1, below, shows last year's sales history for the model 200 series at each retail location.

Series 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Std Dev Total
Outlet 1 9 5 15 10 12 5 3 12 23 12 8 5 5.5 119
Outlet 2 10 10 30 12 22 15 17 30 11 14 12 15 7.1 198
Outlet 3 12 22 5 15 14 23 10 4 9 15 3 5 6.7 137
Total Sales 31 37 50 37 48 43 30 46 43 41 23 25 8.9 454

As can be seen, monthly sales varied, but generally, sales remained fairly constant from year to year. Mike estimated it cost $65 every time the company placed an order for a given model at each location. The supplier's lead time is a hefty two months, but fortunately it has been constant over time. Historically, they've stocked to a 98% service level. Each bike model cost $75 per bike and Mike figures that holding cost to be 25% of the purchase price on an annual basis. With their high service level, there was naturally, a lot of extra safety stock in inventory. Mike knew every additional unit of safety stock (recall safety stock is any inventory held in excess of average demand) added directly to the total cost of inventory in the form of added holding cost. That is, total cost is equal to the cost of ordering plus the cost of holding inventory, where the cost of holding inventory is equal to the cost of holding average inventory plus safety stock.

a. Using the s, S model, what are the order quantities, reorder points, and total annual inventory costs associated with inventory management of the Series 200 line of bikes at each location?

b. What would be the order quantity, reorder point, and total annual inventory cost for a consolidated plan where bikes are stored at a central distribution center?

c. Would you recommend switching to centralized inventory management? What other factors besides costs should Mike consider?

Please see attached for full question.

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