Norton Auto Supply Case Study

 Norton Auto Supply Case

Limitations

     We recommended decreasing the amount of safety stock that the Norton is currently carrying at both their CDC and RDC because the costs were too high. However, since such stocks guaranteed excellent service, decreasing them would not only affect the service level but also eradicate the leeway provided against random variations in demand. As out-of stock-parts are not emergency ordered and it is difficult for Norton to judge weather their service objective is met, it is also hard to calculate the costs of revenues forgone due to the decreased service level caused by the decreased safety stock. Thus, such information would also have to be taken into consideration in the calculations.

        In order to accept using FedEx’s overnight shipment service the service rate out of stock had to be decreased to 96% with a 3% service between 24 hours, which decreased the service on 2% of requests and improved it significantly on 1%.  Thus the company would be operating at a service slightly different from its 98% objective. Even though the benefits of this option seem to be great, the option is not exactly in line with the company’s objectives and purposes which could be a problem for the company itself. Nonetheless, slightly negative consequences are unavoidable, in any case. But to decrease the effects, this option should only be applied to certain items, possibly the most emergent items that need to be delivered right away.

       Moreover, in our calculations of the overnight shipment cost for working with FedEx, we assumed that the shipment cost would be $1 per lb. This was due to the combined effects of the facts that the FedEx shipment cost not representing the true additional cost as it did not deduct the cost that would have otherwise been incurred by Norton’s own delivery system, the lack of information given regarding the number of dealers that Norton serves, and not considering discount options due to the large quantities shipped. Thus, the $1/lb used for the calculations is merely an estimation and should be taken with a grain of salt. Further calculations should be done as soon such crucial information becomes available.

       Furthermore, by using the FedEx overnight shipment service, Norton is adding a new channel to the supply chain. That means that not only will they be incurring additional shipment cost, but they may also bear cost for coordinating and planning to work with FedEx which can affect the overall cost of handling inventory for Norton. On the other hand, by adding FedEx to the supply chain, Norton might be able to benefit from information and best practices spillover which would increase their productivity.  Such costs or benefits were disregarded in our calculations and in turn our analysis.

    In terms of the implementation of the inventory optimization software, we failed to take the quantify the associated costs. These cost include purchasing, training employees to use the system and maintenance. Furthermore, such systems are most beneficial when customized to incorporate the firms core competencies and its customers’ needs. In Norton’s case, because is a company of smaller scale, it might be very costly to do so.

Recommendations

    Norton’s target service level is 98%, However, after analyzing the current inventory system at the CDC as well as at the RDC we have discovered that the company is currently operating at a much higher service level. In fact, at the CDC level the service rate is 100% for all parts except for the Valve, which has a 99.99% service level. It is the same case at the RDC level with the difference that the Valve is being operated at a 13.5 % service level and the leather seats at a 61% service level. (For the calculations of the safety stock at the RDC level we have used the standard deviation of the lead time + the cycle time as mentioned in class, because it could take up to 13 days for a part that is out of stock to be reordered.)

In both the case of the CDC and RDCs the annual inventory costs associated with such cost are relatively high, $3,246,000.8 and $101,412.60 respectively (see appendix X).  Thus we are looking into reducing the fill rate (a.k.a service level) target in order to decrease cost without effectively harming the customer satisfaction.

    We have looked into reducing the service level to 99 % at the CDC level and 97.5 % at the level, keeping in mind that the RDC will continue to follow a periodic ordering policy as in the past, as this has worked out well for them as indicated in the case. Implementing these changes, the company could decrease its annual cost at the CDC level to be $155,677.37 and at the RDC level to be $73,708.16 (See appendix X).  This is great decrease in cost with minimal sacrifice in customer satisfaction level. Looking at the table X in the appendix X we can see that under these conditions the annual cost for each of the 3 part categories A, B and C in both CDC and RDCs. However, we can also observe that the cost for the valve and the leather seats has decreased slightly. Due to the minimal increase in costs for these two parts and the huge decrease in total costs we believe that these increases could be ignored.

     Furthermore, at the RDC level instead of a 97.5 fill rate, Monica was considering implementing a system that offers the dealers a 96 % service out of stock and 3 % service within 24 hours. Under this strategy we have to take both annual cost of inventory as well as annual shipping cost into consideration. Looking at appendix X we can see that the overall annual total cost of this strategy is in fact higher than the strategy of decreasing the fill rate to 97.5 %. However, this does is not the case for all part categories. The table in the appendix shows that although the total costs have increased for category A and C parts, they have decreased for category B parts, although the hood ornament cost increased slightly. But in order to make things easier to overlook and control treating parts as part of their category rather than individual items would be easier and more beneficial.