Franklin Fan Company

Franklin" rel="nofollow">in Fan Company is a manufacturer and distributor of electric fans founded by two disenchanted engin" rel="nofollow">ineers, Dan Block and Ed Spriggs, one an electrical engin" rel="nofollow">ineer, and the other a mechanical engin" rel="nofollow">ineer. Origin" rel="nofollow">inally located in" rel="nofollow">in Block’s garage, the firm showed slow but steady growth for seven years before it relocated to an old, abandoned meat-packin" rel="nofollow">ing warehouse on Chicago’s South Side. With in" rel="nofollow">increased space for in" rel="nofollow">inventory storage and manufacturin" rel="nofollow">ing, the company was able to begin" rel="nofollow">in offerin" rel="nofollow">ing an expanded lin" rel="nofollow">ine of fans. This in" rel="nofollow">increased selection, combin" rel="nofollow">ined with the trend for ceilin" rel="nofollow">ing fans, led to an explosive growth of the busin" rel="nofollow">iness. Fifteen years later, Franklin" rel="nofollow">in Fan was the largest in" rel="nofollow">independent manufacturer and distributor of fans in" rel="nofollow">in the north central region. Recently, Franklin" rel="nofollow">in Fan relocated to a sparklin" rel="nofollow">ing new office, warehouse, and manufacturin" rel="nofollow">ing complex off Interstate 55 in" rel="nofollow">in suburban Chicago. The warehouse space alone occupies more than 100,000 square feet. Although only a handful of new products have been in" rel="nofollow">introduced sin" rel="nofollow">ince the warehouse was constructed, the warehouse utilization in" rel="nofollow">increased from 65% to more than 90% capacity. Durin" rel="nofollow">ing this same time period, however, sales growth stagnated. These conditions motivated Block and Spriggs to hire the first manager from outside the company in" rel="nofollow">in the firm’s history. It is June 6, Sue McCaskey’s first day in" rel="nofollow">in the newly created position of Materials Manager for Franklin" rel="nofollow">in Fan. A recent graduate of a promin" rel="nofollow">inent busin" rel="nofollow">iness school, McCaskey is eagerly awaitin" rel="nofollow">ing her first real-world problem. At approximately 8:30 AM, this problem arrives in" rel="nofollow">in the form of status reports on in" rel="nofollow">inventory and orders shipped. At the top of the extensive computer prin" rel="nofollow">intout is a handwritten note from Joe Donnell, the Purchasin" rel="nofollow">ing Manager: “Attached you will fin" rel="nofollow">ind the in" rel="nofollow">inventory and customer service performance data. Rest assured that the in" rel="nofollow">individual in" rel="nofollow">inventory levels are accurate because we took a complete physical in" rel="nofollow">inventory count at the end of last week durin" rel="nofollow">ing a weekend shutdown. Unfortunately, we do not keep compiled records in" rel="nofollow">in some areas as you requested. However, you are welcome to do so yourself. Welcome aboard!” A little upset that aggregate in" rel="nofollow">information is not available, McCaskey decides to randomly select a small sample of approximately 100 items and compile in" rel="nofollow">inventory and customer service characteristics to get a feel for the “total picture.” The results of this experiment reveal to her why Franklin" rel="nofollow">in Fan decided to create the position she now fills. It seems the in" rel="nofollow">inventory is in" rel="nofollow">in all the wrong places. Although an average of approximately 60 days of in" rel="nofollow">inventory is on hand, the firm’s customer service level is in" rel="nofollow">inadequate. Franklin" rel="nofollow">in Fan tries to backorder the customer orders not immediately filled from stock, but some 10% of demand is bein" rel="nofollow">ing lost to competin" rel="nofollow">ing 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 in" rel="nofollow">inventory holdin" rel="nofollow">ing costs, McCaskey believes that a cycle-service level of at least 95% should be achieved. McCaskey knows that although her in" rel="nofollow">influence to in" rel="nofollow">initiate changes will be limited, she must produce positive results immediately. Thus, she decides to concentrate on two products from the extensive product lin" rel="nofollow">ine: the CF151 ceilin" rel="nofollow">ing fan and the PF032 personal fan. If she can demonstrate significant gain" rel="nofollow">ins from proper in" rel="nofollow">inventory management for just two products, perhaps Block and Spriggs will give her the backin" rel="nofollow">ing needed to change the total in" rel="nofollow">inventory management system. The CF151 is manufactured in" rel="nofollow">in house. Actual demand for the last 21 weeks of this year is shown in" rel="nofollow">in the followin" rel="nofollow">ing table. Week Actual Demand Week Actual Demand 32 971 43 907 33 962 44 924 34 999 45 952 35 980 46 924 36 952 47 962 37 952 48 943 38 943 49 943 39 971 50 971 40 934 51 1,008 41 934 52 906 42 962 A quick review of past orders, shown in" rel="nofollow">in another document, in" rel="nofollow">indicates a lot size of 2,000 units is bein" rel="nofollow">ing used and that the lead time is fairly constant at two weeks. Currently, at the end of week 52, no in" rel="nofollow">inventory is on hand, 102 fans are backordered, and the company is awaitin" rel="nofollow">ing a scheduled receipt of 2,000 fans. The PF032 personal fan is also produced in" rel="nofollow">in house. Actual demand so far this year is shown in" rel="nofollow">in the followin" rel="nofollow">ing table. Week Actual Demand Week Actual Demand 42 346 48 962 43 635 49 1,019 44 1,019 50 1,038 45 1,038 51 942 46 981 52 1,000 47 1,019 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 sin" rel="nofollow">ince its in" rel="nofollow">introduction in" rel="nofollow">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 bein" rel="nofollow">ing used, with the lead time fairly constant at three weeks. The wholesale prices that Franklin" rel="nofollow">in Fan charges its customer are $129.99 for the ceilin" rel="nofollow">ing fan and $19.99 for the personal fan. Because no quantity discounts are offered on these two highly profitable items, gross margin" rel="nofollow">ins based on current purchasin" rel="nofollow">ing practices are 32% of the wholesale price for the ceilin" rel="nofollow">ing fan and 48% of the wholesale price for the personal fan. Franklin" rel="nofollow">in Fan estimates its cost to hold in" rel="nofollow">inventory at 21% of the in" rel="nofollow">inventory in" rel="nofollow">investment. This percentage recognizes the opportunity cost of tyin" rel="nofollow">ing money up in" rel="nofollow">in in" rel="nofollow">inventory and the variable costs of taxes, in" rel="nofollow">insurance, and shrin" rel="nofollow">inkage. The annual report notes other warehousin" rel="nofollow">ing expenditures for utilities, main" rel="nofollow">intenance, and debt service on the 100,000 square foot warehouse, which was built for $1.5 million. However, McCaskey reasons that the warehousin" rel="nofollow">ing costs can be ignored because they will not change for the range of in" rel="nofollow">inventory policies she is considerin" rel="nofollow">ing. Out-of-pocket costs for Franklin" rel="nofollow">in 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" rel="nofollow">in Fan, some orders are delivered to customers. To provide this service, Franklin" rel="nofollow">in 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 in" rel="nofollow">increase the orderin" rel="nofollow">ing costs for Franklin" rel="nofollow">in Fan to in" rel="nofollow">include delivery charges. QUESTIONS 1. Put yourself in" rel="nofollow">in Sue McCaskey’s position and prepare a detailed report to Dan Block and Ed Spriggs on managin" rel="nofollow">ing the in" rel="nofollow">inventory of the CF151 ceilin" rel="nofollow">ing fan and the PF032 personal fan. Be sure to present a proper in" rel="nofollow">inventory system and recognize all relevant costs. 2. By how much do your recommendations for these two items reduce annual cycle in" rel="nofollow">inventory, stockout, and orderin" rel="nofollow">ing costs?