Four Star Industries Case Study

Four Star Industries was a successful mattress manufacturer in Singapore in the 80s. In fact, in 1988 the won the Grand Prix for International-Quality – Europe 89. In the 1990s the market was divided among three local manufacturers and a few foreign manufacturers. As competition increased, Four Star Industries struggled to stay competitive. In 2002, they were stocking out on many of their mattress models and thus were not able to refill their orders. They were concerned about losing some of their long-term employees who were becoming stressed by the operational problems. The root of the issue was that over the years, the company had added different varieties to appease their resellers’ desires. Additionally, Four Star Industries was maintaining most of the supply chain inventory in their own warehouse, again because of pressure from their resellers. However, the orders coming in from resellers were not constant. Normally, the seasonal demand was predictable, but during reseller promotions, it became uncertain. Thus, due to this high variability, Four Star Industries struggled with maintaining safety stock on all their SKUs and suffered severe shortages. Finally, they also needed to maintain a large raw material inventory due to high minimum order quantities on their textiles and wires.

Question 2

The most significant way that the proliferation of mattress varieties impacted Four Star’s operations was in their inventory. The company needed to maintain a safety stock of every SKU they manufactured, so increasing their number of SKUs increased their finished product inventory. Additionally, as new options for mattresses were developed, the raw material inventory also increased. In order to offer mattresses with different quilt panels, the company had to purchase different kinds of textiles, each of which had a minimum order quantity. Finally, the work in process inventory was also very high because the different kinds of quilt panels was a function of the number of textile options, the number of foam options, and the four mattress sizes (Single, Super Single, Queen, and King). As a response to the need to maintain a higher inventory, Four Star Industries moved to a larger building. Thus, increased mattress variety also caused there to be an increase in Fixed Asset cost.

Question 3

Option 1

The first option Sia Meng was considering was to reduce the number of mattress models manufactured to the levels in 1996 or 1998. This would reduce the amount of inventory he would have to hold. There would not be as many different raw material requirements, and the total amount of safety stock would be reduced as well. With fewer SKUs, he will increase his fill rate and reduce the number of stock outs. However, Sia Meng should be careful about reducing the number of mattress models too much. One of the factors that makes Four Star Industries attractive to dealers is the variability that they are able to provide. If they cut down their SKUs too much, the dealers may consider dropping Four Star Industries.

Option 2

The second option Meng considered was to insist that the dealers ordered a minimum number of mattresses corresponding to the batch size for each model for which they placed an order. This would also reduce inventory. Now Four Star Industries would not be forced to produce a whole lot of a certain kind of mattress just to fill an order of 1 unit. Additionally, this would set up a pull system that would allow the company to fill orders from their work in process inventory (the quilt panels and springs) rather than their finished product inventory. However, this policy may dissuade dealers from continuing to sell Four Star Industry’s products. It would require that the dealers hold some of the inventory, and they may not want to do this.

Option 3

The third option was to consider reducing the safety stock requirement for the finished mattresses. This approach may be too general. It would be better to look at each SKU and decide safety stock individually. The stock out problems are mainly a result of unexpected demand in slow-moving mattresses. Reducing safety stock there would not prevent these stock-outs. In fact, it would make them worse. However, increasing safety stock for slow-moving mattresses wouldn’t work either. Although it could sometimes prevent a stock-out, it may also increase inventory so much that it wouldn’t be worth it.

Option 4

The final option was to reallocate the manufacturer to a cheaper overseas location. This option may help the company reduce their production costs long term, but it would not solve the stock-out problem. If Four Star Industries manufactured overseas, their delivery lead time to the dealers and their customers would be increased and the quality of their products would decrease. Furthermore, in