questions 1-4 please! will leave a great review!

You are the Director of Purchasing at Endurance Products, Inc. Endurance produces and distributes compact, attractively priced exercise equipment. The companys mission is:

Outperform the competition through successful partnerships while maintaining effective communication, consistency, superior service, and honest, active marketing programs. Stamina Products Inc. will continue to pursue excellence. Whether its the design of our equipment or our exceptional customer service, we are truly dedicated to building a healthier, stronger you.

You supervise production of the Endurance folding exercise bike with a built-in heart rate sensor. The bike, which has a suggested retail price of $98.00 at Walmart, Amazon, QVC, and various other outlets, is popular among apartment dwellers and others with limited space for storing exercise equipment. The gross margin on the bike, 35%, isnt spectacular; but its a profitable product that will contribute more as sales grow because there will be no incremental G&A expenses tied to growth for the foreseeable future.


Figure 1: Endurance Exercise Bike
The product requires simple assembly by the consumer. The frame is ready to use after the pedal box, the seat, and the handles with sensors and the heart rate monitor are attached. Total time to unpack and assemble the bike is 25 minutes for most buyers.

Price, which is significantly lower than competitors folding bikes, is Endurances competitive advantage for this product. However, consumers of fitness equipment demand quality even at the low end of the market.

Demand

Endurance shipped 82,400 folding bikes in the fiscal year that just ended on January 31, very close to its forecast. An increase in the upcoming year is unlikely due to some recent quality issues that must be addressed, so a volume increase is not in this years forecast.

Demand was distributed evenly month by month with one exception. New Years resolutions caused January to account for 20% of a year's total sales. Timing of shipments for January sales always is the key to capitalizing on the demand spike. Retail outlets are preoccupied with holiday related sales through December 25th. They do not want to add inventory until then; but when December 26th arrives, they want three weeks of steady delivery to match demand.

Endurance ships approximately 6,000 units per month February through December. It ships just over 16,000 at the end of December and into January. The company analyzed the costs and risks of matching production to demand and decided to produce at a constant monthly rate instead. Bikes are packaged and stored in a nearby warehouse. The growing inventory is depleted when the January demand spike occurs. The warehouse space costs $0.25 per square foot per month plus $0.10 per square foot for utilities. To date, Endurance has not used more than 30% of the facilitys 50,000 square feet of space.

Process

All parts of the bike are imported from non-US suppliers to be packaged and shipped from Endurances Indiana operation. The only assembly performed in Indiana is attaching the heart monitor to the hand handles. Endurance packed those two parts separately and had consumers join them, but that process proved challenging for many users. Providing the pre-assembled handle-monitor part preempted warranty claims, eliminated the need to have a tech service team, and increased customer satisfaction as shown in sellers product ratings.

Frames, hand handles, and the pedal assemblies are made in Mexico. Frames and handles are made by The Permaneo Company in a former auto parts factory outside of Mexico City. Pedal assemblies are made by Aguante Enterprises of Ciudad Jurez, a joint venture of The Permaneo Company and El Pasos Might-Could Enterprises. Both businesses have been reliable, low cost providers.

The heart rate sensor was made in China through January of 2019; but after six months of 25% tariffs with no end in sight, Endurance decided it no longer could absorb the extra import cost on such a tight margin product. Several potential suppliers bid on the contract; and a Malaysian company, Ketahanan Industries, won the business.

Problems

The change to Ketahanan Industries as the source for heart rate sensors has not met expectations. Ketahanan produced the assembly for $5.50 per unit, $1.00 less than the next lowest cost bidder. Shipping cost is $1.00 per item, the same as it was when it was shipped from China. The problem is that nearly 4% of the sensors stopped working within 90 days of use. The failure rate had been less than 2% when they were made in China. Endurance replaces failed sensor units at no charge.

Because online reviews are disproportionately filed by dissatisfied customers, the folding bikes ratings fell. On Amazon, for example




Table 1: Ratings of online reviews

Rating Before Ketahanan After Ketahanan
5 star 70% 53%
4 star 15% 17%
3 star 15% 10%
2 star 0% 10%
1 star 0% 10%

Marketing data suggests that high and low ratings influence sales either positively or negatively by 10% of the years forecast.

Endurance has the right to deduct the cost of defects identified through its packaging process; but because bikes can be stored in the warehouse for up to 11 months before theyre sold and it will take time after that for sensors to fail in the field, there is no provision for recovering the cost of items that fail months after delivered.

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