Four Star Industries is facing a number of problems. Their sales have fallen from $9 million to $6 million, their customer service fill rate has fallen from 70% to 60%, and their employees are leaving the company and becoming increasingly disgruntled. The root cause of these issues is demand variability driven by SKU proliferation. Four Star has gone from offering 13 SKUs in 1996 to 230 SKUs in 2002. The market for mattresses has become much more competitive at the retail level, so retailers are in turn demanding customized products to distinguish themselves from competitors. Mattress manufacturers such as Four Star rely on the retailers to sell their products, so manufacturers don’t have much leverage in negotiations. Besides demanding more SKUs, retailers are also demanding mattresses be delivered to customers two days after a customer places an order, and the retailers are not willing to hold any inventory at their stores. All of these increased demands from retailers, but especially the SKU proliferation, have caused Four Star’s performance to decrease in terms of customer service, revenue, and net income. At present, Four Star is considering various options regarding how to move forward with their business: 1. Reduce the number of SKUs offered to retailers
2. Insist that retailers order a minimum number of mattresses corresponding to the batch size for each model for which they placed an order 3. Reduce the safety stock requirement for the finished mattresses 4. Relocate the manufacturing to a cheaper overseas location 5. Reconfigure its product design, manufacturing, and order fulfillment to improve operations
The root cause of Four Star’s problems is that they have excessive SKU proliferation, which in turn causes increased demand variability. We believe that the best way to combat the increased demand variability and in turn improve customer service...