Case Study # 2

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CARLS COMPUTERS
There was no question about Carls genius. Seven years ago he decided to enter the
competitive nightmare that the personal computer business had become. Although
on the surface that appeared to be a rather nongenius-like move, the genius came in
the unique designs and features that he developed for his computer. He also figured
a way to promise delivery in only two days for the local and regional market. Other
computer makers also had rapid production and delivery, but they were national
competitors, and the delivery time from distant locations generally made Carl able to
outcompete them on delivery.
Carl soon had a loyal following, especially among the many small businesses in
the area. Not only could Carl deliver quickly, but he also had very rapid service to
deal with any technical problems. That service feature became critical for the local
businesses whose very livelihood depended on the computers, and soon that rapid
service capability became more important than the initial product delivery. Since
most of these businesses were fairly small, they could not afford to have their own inhouse computer experts, so they depended heavily on Carl.
The Current Situation

All was not totally rosy at Carls Computers, however. Recently they had hired Rosa
Chang for the newly developed position of Inventory Manager for Aftermarket
Service. In the first week Rosa got a good idea of the challenges facing her after she
interviewed several of the people at Carls.
RANDY SMITH, CUSTOMER SERVICE MANAGER: Im not sure what you need to do, but whatever it is needs to be done fast! At this point our main competitive edge other than product delivery is service response, and Im always hearing that we cant get a unit in the
field serviced because some critical part is missing. Both the customers and the field service people are complaining about it. They make a service call, find out they need a certain part, but in many cases were out of the part. The customers tend to be fairly loyal,
but their patience is wearing thinour policy is to provide at least a 98% customer service level, and were not even close. Thats not the only problem, though. Since our service is declining, the customers are looking more closely at our prices. Id like to cut
them a break, but our financial people tell us our margins are already too thin, and get
thisone major reason is that our inventory and associated inventory costs are too high!
It looks to me as if we have a very large amount of the wrong stuff here. I dont know that
for sure, but I sure hope you can find a solution, and fast!
ELLEN BEDROSIAN, CHIEF ENGINEER: Boy, am I glad youre here! The inventory problems are
killing us in engineering. Carls has always been known for unique designs, and weve been
trying hard to keep ahead of the competitive curve on that issue. The problem is that most
of the time when we push hard to get a new design out, the inventory and financial people
tell us we have to wait. It seems like they always have too much of the old design inventory
around, and the financial hit to make it immediately obsolete would be too severe. Were
told that as soon as we announce a new design many of our customers would want it, so
that tends to make most existing old design materialeven for serviceobsolete. We try
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to tell the service inventory people when we have a new design coming so they can use up
the old material, but somehow it never seems to work out.
JIM HUGHES, PURCHASING MANAGER: Well, Rosa, I wish you luckyoull need it. Im getting pressure from so many directions, sometimes I dont know how to respond. First,
the financial people are always telling me to cut or control costs. The engineers then are
always coming out with new designs, most of which represent purchased parts. A lot of
our time is spent working with suppliers on the new designs, while trying to get them to
have very rapid delivery with low prices. Although most can live with that, where we
really jerk them around is with the changes in orders. One minute our field service people tell us theyve run out of something and they need delivery immediately. In many
cases they dont even have an order for that part on the books. The next thing you know
they want us to cancel an order for something that only a day before they said was critical. Our buyers and suppliers are good, but theyre not miracle workers and they cant do
everything at once. Some of our suppliers are even threatening to refuse our business if
we dont get our act together. Weve tried to offer solutions for the field service people,
but nothing seems to work. Maybe they just dont care.
MARY SHOULTON, CHIEF FINANCIAL OFFICER: If you can help us with this inventory problem, youll be well worth your salary, and then some! Here we are being competitively
crunched for price, delivery, and efficient service, and our service inventory costs seem
to have gone completely out of control. The total inventory has climbed more than 200%
in the last two years while our service revenues have only grown 15%. On top of that, we
have had an increase in obsolete material write-off of 80% in that same two-year period.
In addition, significant inventory-related costs have come from expediting. Premium
freight shipments, such as flying in parts, caused by critical part shortages cost us over
$67,000 last year alone. Do you realize that represents almost 20% of our gross profit
margin from the service business? With our interest rates, warehousing, and obsolete
inventory costs, we recognize a 23% inventory holding cost. Given our huge inventory
level, that takes another big bite our of profits. All this suggests to me we need to get
control of the situation or we may find ourselves out of business!
FRANKLIN KNOWLES, FIELD SERVICE SUPERVISOR: Until they hired you, the other production
supervisor and I had been in charge of inventory. I hate to discourage you, but it looks like
an impossible job. The purchasing people bought a bunch of standard-size bins, and they
told us that as soon as we had a weeks average part usage for each part to order more
specifically, enough to fill up the bin. Since most of their lead times were a week or less,
it sure made sense. All the records were kept on computer, therefore the computer could
be programmed to tell us when we had only the weeks supply. It made great sense to me,
but something kept going wrong. First, field service technicians seemed to frequently grab
parts without filling out a transaction. That made our records go to pot. As a matter of
fact, we had a complete physical inventory a couple of months ago, and it showed our
records to be less than 30% accurate! I suspect our records are almost that bad again, and
we dont have another physical inventory scheduled for another nine months.
Second, with our records so bad the field service technicians can never tell if we really
have the parts or not. Several of them have started to take large quantities of critical parts
and are keeping their own inventory. When it comes time to replace their own private
stock, they take a bunch more. That has made the demand on the central inventory
appear very erratic. One day we have plenty, and the next day were out! You can imagine
how happy purchasing is when the first time they see a purchase order it is requesting an
immediate urgent shipment. Weve made a policy that the technicians are only supposed
Order Quantities
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to have a few specifically authorized parts with them, but Im sure many of the technicians
are violating that policy big time.
QUENTIN BATES, FIELD SERVICE TECHNICIAN: Something is drastically wrong with our inventory, and its driving me and the other techs crazy. Were not supposed to keep much
inventory with us, only a few commonly used parts. If we have a field problem requiring
a part, were supposed to be getting it from the central inventory. Problem is, much of
the time its not there. We have to take time to pressure purchasing for it, and then have
to try to calm our customers while we wait for delivery. In the meantime, the customers
systems are often unusable, and theyre losing business. It doesnt take too long before
theyre really mad at us. I guess the people at purchasing dont care, since we have to
take all the heat. Lately Ive been taking and keeping a bunch of parts Im not really supposed to have in my inventory, and I know the other field technicians do also. Thats
saved us a few times, but the situation seems to be getting worse.
Now that Rosa had some real information as to the nature of the problems, she
needed to start developing solutionsand it appeared that it was important to come
up with good solutions fast! The first thing she tried to do was take a couple of part
numbers at random and see if she could improve on the ordering approach.
The first number she selected was the A233 circuit board. The average weekly
usage was 32. The lead time was given as one week. The board cost $18, and the cost
to place an order was given as $16. The quantity ordered to fill the bin was usually 64.
The second number was the P656 power supply. It cost $35, but since the supplier
only required a fax to order the cost was only $2 per order. Even with the fax the
delivery lead time was two weeks. The average weekly demand for the power supply
was 120. The company typically ordered 350 units at a time. Recently the supplier for
the circuit board hinted that it might be able to give Carls a price break of $2 per
board if Carls would order 200 or more at a time.
Case Analysis
1. Using the data on the two part numbers given, provide a comprehensive evaluation of
the ordering policies. Compare the present annual average cost with the cost of using a
system such as EOQ, and discuss any other order policies as appropriate.
2. Should Carls pursue the price break? Why or why not?
3. What do you think the sources of the other problems are? Be specific and analyze as
completely as possible.
4. Develop a comprehensive plan to help Rosa get the inventory back under control.

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