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QSO 322 Acme Bicycle Case Study

The purpose of this case study is to apply a number of the key concepts covered in the course textbook to a notional business case. Consider yourself the supply chain manager (SCM) for this company. In this position, you work closely with the plant production manager to support the production schedule. The production schedule is updated every quarter based on the latest sales estimates from the marketing department. You also work with the purchasing department regularly for reorder of raw materials from various suppliers. Another one of your key responsibilities is that you manage the warehouse, so you are responsible for the efficient use of the limited warehouse space that you do have. You must maintain sufficient inventory to ensure that there are no work stoppages because of stock outages. As the SCM, you are also responsible for outbound transportation and finding economical means to ship finished goods in a timely manner. In view of your wide range of responsibilities as the SCM, you play a vital role in the profitability of your company.

Company background: Acme Bicycle Company is a medium-size bicycle manufacturer located in Wichita, KS. It specializes in "theme" bicycles for children and teenagers. The themes include princesses from fairytales and animals, which are popular with girls, and aliens, robots, and sports heroes, which are popular with boys. As such, Acme Co. routinely produces its bicycles in small batch sizes to follow the latest popular trends with its children and teenager customer base. This also ensures that the company will not be left with unsold bicycles that are out of style with its customer base. The following is a summary of Acme Co.:

Product lines: At any one time, Acme Co. is likely to be in the process of producing three different types of bicycles based on market demand projections and current finished goods inventory levels. Additionally, the profit levels of each of the bicycles vary, and at times, the production of higher-profit bicycles takes precedence over lower-profit bicycles based on production and material capacities and production constraints of the labor force and production machinery. Specific information on production and transportation costs and the sales price of the bicycle product line are given in the case study data sheet. For purposes of this case, unit profit for each bicycle is calculated by subtracting the production and transportation costs from the sales price.

Production line: To construct a bicycle, the Acme Co. production line has consolidated and streamlined its production process so that bicycle building can be accomplished in three segments on the production line. These segments are the Metal Shop for initial molding and shaping of the metal parts, the Components shop for the building of component sets, which include the seats, tires, and accessories for each unique bicycle, and the Final Assembly shop for the assembly of all the components together, the final inspection, and testing. Due to the nature of the work in the three production segments, each segment has a different capacity level of how many bicycles it can produce in a normal workday. Acme's normal production is 40 production hours a week to cover production requirements for most of the year. Production occurs Monday through Friday, and the work hours of the production crew are designed such that some workers come in early to start up the assembly line and some workers come in later to close down the assembly line. Lunch breaks are staggered such that some work is being done throughout the entire 8-hour production shift. However, during peak demand periods, such as the Christmas season, Acme Co. can begin overtime production for up to 12 hours per day for limited periods. Naturally, this overtime will result in higher labor costs, which will decrease profit, so overtime is used only sparingly.

Components Workshop: For each bicycle, the Components Workshop must build a components set for each of the different types of bicycles produced in the assembly line. Production must ensure that there are sufficient component sets built to support production, so part of the SCM's job is to ensure that the Components Workshop production is adequate throughout the production cycle.

Inventory Management: In order to minimize overall cost of inventory, Acme Co. practices just-in-time inventory on the production line to the greatest extent possible. However, there is a requirement for a warehouse at the production location to ensure a continuation of operations in the event of production variation. This warehouse space is limited in capacity in order to minimize the carrying costs of inventory and help prevent the possibility of having obsolete stock. Acme Co. orders its parts using the economic order quantity called for by the purchasing department.

Suppliers: Acme has been in business for over a decade and now has established purchasing relationships with several key suppliers of the raw materials such as metal, rubber, plastics, and so on. Since Acme's production levels vary greatly throughout the year, its ordering levels vary greatly as well.

Distributors: Acme does not retail its bicycles directly to the public but ships to two different wholesalers that have distribution centers in the geographic region. One is located in Denver, CO, and the other is in Omaha, NE. The shipping costs for each of these wholesalers' locations differ, and this amount affects the profitability of the final sale. It is important to consider the shipping costs, as this greatly affects profitability, and the plant accountant is concerned about the rising costs of shipping. Data for calculating shipping costs is given in the case study data sheet. The SCM must provide accurate estimates of shipping costs to the plant accountant to ensure sufficient cash flow to cover operating expenses.

Product support: Acme Co. prides itself on having a very durable product, and each bicycle comes with a limited warranty for 1 year from date of purchase. In order to support this warranty policy, Acme Co. maintains a set-aside amount of capital to honor warranty claims by way of a warranty liability account. This set-aside is based on the historical failure rates and the sales within the warranty period. The plant accountant must ensure that the right amount of money is available in the warranty liability account. If the amount is too small, Acme Co. will not be able to honor its warranty commitments to its customers. However, since the warranty liability account must be kept in a very liquid form in order to cover the variances of honoring warranties, this amount accrues very little interest and could make much greater interest for the company if the money were used for other purposes. Data needed for calculating the amount of the warranty liability is given in the case study data sheet. The amount of the liability is based on the production costs for the estimated percentage of warranty claims, for each type of bicycle, plus the average transportation costs of the two distributors, for that same number of bicycles.

Case Analysis Scenario and Questions

You are an SCM for Acme Co., and the plant director wants to ensure that there will be sufficient logistic support for the anticipated production schedule. A key question for the plant director is "Will I be able to meet the production requirement of the anticipated market demand given my capacity?" The plant accountant is also concerned about profit given the rising cost of materials and shipping costs. Some of the key questions on the plant accountant's mind are "What will this production run cost so that I can ensure that we have adequate cash flows?" and "What will our profit be given our product mix and shipping costs?" Use the accompanying case study data sheet for the underlying data. In order to answer their concerns, answer the following questions:

4.      Calculate the projected transportation costs for the firm for next year. Assume that the products were shipped in equal amounts to the two distributors. Assume also that the average sales for the four months given will be the average for the entire year.

12.  One of the key indicators of success in inventory management is inventory turn. Calculate the inventory turn for the front safety reflectors (each bike has one). The average annual sales have been 5,500, and the average inventory level for the reflectors has been 500.

16.  The Components Workshop is reconsidering its batch sizing. It wants to estimate the best lot size for the upcoming production year. The estimate for the annual demand will be based on 9 times the average of the 4 months of the Projected Sales in the Data Sheet, due to the exceptionally high demand in December. What is EPQ for the upcoming year's production run? (Use the video https://www.youtube.com/watch?v=6VjByg6VUEk&feature=youtu.be to assist you with completing this problem).