1. Create a process flow chart (process map) clearly identifying activities, routes and other data in the case. Bring a copy of your flow chart to class.
Throughput, inventory and cycle time measures for relevant process steps located in Exhibit B.
2. What do you think about the decision to launch a sales drive in 1997? What actions would you suggest that Richard focus on to improve performance at CRU? Give a concrete plan with anticipated benefits.
The sales drive plan failed to take into account the economics of their CRUs business radically reducing profits. As average rental weeks decreased (see Exhibit A), the incremental inventory required to support CRUs stocking policy increased inventory by roughly 18% over last year's values. It also accelerated the rate of receipts and the onerous costs associated with processing damaged returns. Ultimately these costs drove CRUs profits into negative territory forecasted to produce a net profit of -4.6% over a 52 week period.
Rather than focus on increasing revenue, Richard should work to make some operational improvements. Using last year as a baseline, by eradicating the misclassification of non-defectives in the Receiving Department, Richard stands to
reduce the costs associated with running his business by roughly $13k. Moreover, by reducing misclassification, Richard will also reduce the amount of inventory required to run his business by 180 computers reducing depreciation expense.
Additional gains could be made by improving inventory management. Rather than requiring two weeks of inventory to fill available demand, Richard should consider the variation in demand in his business and choose a more prudent level of safety stock. Available inventory that satisfies two times average demand adds a significant cash burden to CRUs business.
Finally, by letting the company earn the market rate of $40 per computer, the implications of a price increase and reduced costs would...
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