ABC Bikes: The Service Department

Introduction

Several years ago, Jan ABC, owner of ABC Bikes, recognized the need to organize a separate department to deal with service parts for the bikes her company makes. Be$$ cause the competitive strength of her company was developed around customer responsiveness and flexibility, she felt that creating a separate department focused exclusively on after$$ market 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 man$$ age the department. At first, the department occupied only a cor$$ ner of the production warehouse, but now it has grown to occupy its own $100,000-$square$-$foot warehouse. The service business has also grown significantly, and it now represents over $15\%$ of the total revenue of ABC 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 ABC 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 ABC Bikes. It was only after he selected his starting date and re$$ quested 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 com$$ pleted 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 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 else$$ where when parts were not available from ABC 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 $95\%.$

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 PQ$123$ Fender Bracket and the XY$789$ Gear Sprocket. ABC Bikes purchases the PQ$123$ from a Brazilian source. The lead time has remained constant, at three weeks, and the estimated cost of a purchase order for these parts is given at $$35$ per order. Currently ABC Bikes uses an order lot size of $120$ for the PQ$123$ and buys the items for $$5$ apiece.

The XY$789$ part, on the other hand, is a newer prod$$ uct only recently being offered. A machine shop in Nashville, Tennessee, produces the part for ABC Bikes, and it gives ABC Bikes a fairly reliable six$-$week lead time. The cost of placing an order with the machine shop is only about $$15,$ and currently ABC Bikes orders $850$ parts at a time. ABC Bikes buys the item for $$10\mathrm{.}75.$

Following is the demand information that Art gave to Mike on his first day for the PQ$123$ and the XY$789$:

Mike realized he also needed input from Ann about her perspective on the busine