CASE SYNOPSIS

Media Art Components (MAC) manufactures flat screen televisions for sale by various big box retailers under a generic brand name. The company was founded in the 1950s when the television industry was in its infancy. Originally, the company manufactured its own brand of televisions which were distributed through various retail outlets. Its brand name was highly recognized by consumers and the company enjoyed years of highly profitable operations.

As television technology and competition changed dramatically over the years, Media Art Components failed to keep up with the changes. Company management relied on their brand presence to maintain their pricing and distribution. This strategy resulted in a reduced market share and nearly forced the business into bankruptcy in the early 1980s.

In the early 1990s, the company changed its name to Media Art Components and began a dramatic turn around. The company dropped its own brand and carved a niche for itself as a low cost producer of flat screen televisions. It produces those televisions, which range in size from 32 inches to 42 inches, for various discount retailers who market them under their respective generic store brand names.

This manufacturing methodology has allowed MAC to significantly reduce its risk of technological obsolescence in its inventory as televisions are primarily produced to order. In addition, this strategy has also broadened their distribution network, but it has resulted in the loss of consumer awareness of their brand. As such, MAC is reliant upon orders from their retail network to maintain production.

INVENTORY MANAGEMENT

Currently, MAC purchases the component parts to produce the televisions from a variety of manufacturers and assembles them in their plant in suburban Chicago, Illinois. Inventory management is critical for MAC as the delay in receipt of any part can delay completion of their flat screen television. The company has invested significant capital in a sophisticated computer and bar code based inventory management system for the various parts to ensure they do not experience a stock out of any component.

One of the primary components for flat screen televisions is the liquid crystal display, or LCD. LCDs allow for a very slim design of the television while providing enhanced video quality. LCDs are two layers of glass material sandwiched together; one layer contains liquid crystals which filter electronic currents creating the images seen on the screen. Many consumers prefer LCD technology to plasma technology for the low heat LCDs emit compared to plasma televisions. In addition, LCDs are relatively light weight, easy to hang on a wall, and come in a variety of screen sizes to meet a variety of demand.

MAC has historically purchased their LCDs from a manufacturer in Mexico, but is considering purchasing them from a new manufacturer based in Seoul, South Korea. Due to the North American Free Trade Agreement (NAFTA), MAC has been able to purchase LCDs from its Mexican supplier free of any trade tariff. The South Korean producer has approached MAC with a pricing proposal for the production and sale of LCDs.

Due to the increased personnel costs associated with completion of various import forms for orders from South Korea, the order cost for the South Korean manufacturer is greater. However, the purchase price from South Korea is less than the Mexican supplier which may offset the increased order cost. The relevant costs for both producers are found in Appendix 1.

In addition to the differing cost schedules, relevant safety stock for each manufacturer differs. Historically, MAC has held ten (10) days of safety stock for the Mexican manufacturer. The South Korean manufacturer has promised quicker delivery time such that MAC projects needing only seven (7) days of safety stock when ordering from them.

As Ben Jackson, the Purchasing Manager of MAC, you consider which manufacturer to choose for the purchase of LCDs. You must consider not only the quantitative analysis of effective inventory management, but also the qualitative factors need to be considered. Can the South Korean manufacturer produce sufficient inventory and deliver it in a timely manner to meet your production needs? How will quality of the two manufacturers compare? What if the South Korean manufacturer fails to meet your expectations how will you be able to return to the Mexican manufacturer?

YOUR ASSIGNMENT: Show your work in appendix or excel.

Again, you are to do an Executive summary on this analysis. Review the organization format from previous cases. You should include in your critical analysis communicating to me the following information

1. Determine the Economic Order Quantity (EOQ) for both suppliers.
2. Determine the Reorder Point for both suppliers.
3. Determine the Total Inventory Cost (TIC) for both suppliers without safety stock.
4. Determine the Total Inventory Cost (TIC) for both suppliers with safety stock.
5. Determine through a Sensitivity Analysis which component(s) of TIC are most sensitive to change (which produce the greatest change in TIC)
6. Your Mexican supplier has heard a rumor that you are considering changing suppliers. In order to incent you to continue to order from them, they have offered you a 2% discount on all orders provided that you order at least 2,000 units with each order. Determine Total Inventory Cost (TIC) for the Mexican supplier given the discount and maintaining ten (10) days of safety stock.
7. Make a recommendation as to which manufacturer to choose, and whether you recommend using safety stock in your inventory management process.

ETHICAL DILEMMA

Ben Jackson, the Purchasing Manager for Media Arts Components (MAC), is completing his annual review of various vendors from whom MAC purchases component parts for assembling into their televisions. As part of that review, he has been meeting with prospective vendors to consider expanding his supplier list.

Janet Roberts, a sales rep from one of the prospective vendors, High Impact Electronics, has advised Jackson that her company will be announcing the development of the next generation of LCD technology that will render MACs current suppliers products obsolete. High Impact expects to announce this development in early December. They expect to be able to deliver the new displays by the end of the first quarter of next year.

If Roberts representations are true, the flat screen television industry stands to be significantly altered. Jackson is keenly aware that MACs failure in the 1980s to keep pace with technology drove the company to the verge of bankruptcy. With the lead time for delivery of LCDs that MAC faces, Jackson has a difficult decision to make.

Today is September 20; you are Ben Jackson. Do you:

1. Believe Roberts and begin reducing your orders for LCDs such that you do not have the risk of technological obsolescence once the announcement is made? If you do, you run the risk of stock outs as you enter the fourth quarter.
2. Consider Roberts statements to be puffery in an attempt to get your orders and continue ordering the volume of LCDs you need? If you continue to order at historic levels of production, how do you explain to the President of the company that you knew about the risk but chose to ignore it?

Develop a rationale that supports one of the two choices above, or develop a third choice of your own and support it.

Appendix 1

Cost Data

Mexico South Korea Order Costs $285 $415 Purchase Price 92 80 Delivery time 24 days 14 days Annual usage 20,000 units 20,000 units Carrying Costs 18% 18% Safety Stock 10 days 7 days Mexico South Korea Order Costs $285 $415 Purchase Price 92 80 Delivery time 24 days 14 days Annual usage 20,000 units 20,000 units Carrying Costs 18% 18% Safety Stock 10 days 7 days