3. Do you think the lost customer sales should be included as a cost of inventory? How would such an inclusion impact the ordering policies you established in Question 1? Several years ago, Jan Northcutt, owner of Northcutt Bikes, recognized the need to organize a separate department to deal with service parts for the bikes her company made.

Because the competitive strength of her company was developed around customer responsiveness and flexibility, she felt a separate department focused exclusively on aftermarket 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 manage the department. At first, it occupied only a corner 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, in that it now represents over 15% of the total revenue of Northcutt 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 Northcutt Bikes.

While Ann has turned out to be a very effective manager

(and now has 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.