Goldfield’s Electronics (GFE) is a private distributor of electronics. GFE distributes a wide range of consumer electronics including DVD players, televisions, MP3 players, stereos (home and auto), digital cameras, etc… They have operated out of their single distribution center in Boone, Iowa since 1979. As most of the big box retailers of these products tend to self-manage their distribution channels, GFE’s customer base is dominated by small and medium sized electronic retailers. Over the years, GFE has developed the reputation of providing consistent and timely service.
This reputation has fueled their growth as they have secured a number of long-term customers. Growing Concerns While GFE is known for its high quality customer service, it has had some recent service failures that have worried Bobby Goldfield, the company’s President. In fact, one of their customers since 1982 has recently defected to a competing distributor due to GFE’s increasing inability to meet demand requirements out of inventory. There are a few key economic trends cited by Mr. Goldfield as contributing factors to this decrease in service.
When GFE began operations over 3 decades ago they managed and distributed approximately 45 stock keeping units (SKU’s) from a limited number of domestic manufacturers. Today, with the emergence of international producers, and the sheer variety of electronic gadgets available to consumers, GFE manages and distributes over 400 SKU’s. This has resulted in GFE increasing its estimated annual cost of carrying inventory from 20% of unit cost in the past to the current 35%. In light of these recent service disappointments, Mr. Goldfield has requested that the inventory management team evaluate the current situation and propose possible improvements to the system. Upon discussions with key customers, Mr. Goldfield has determined that a customer service level of 97. 5% is an appropriate target. Current Environment and Practices As a first step the inventory management team decided to focus on the inventory policy and distribution flow for a representative product that could perhaps provide insight to their problems. They decided to focus on SKU# GNCD10GB, which is one of their best-selling Blu-ray players.
They source this product from the manufacturer’s facility in Guadalajara, Mexico at a unit cost of $175. A review of recent sales data has revealed that this item is on pace to achieve annual demand of 78,000 units over the 260 annual working days. Further, they have estimated that the standard deviation of daily demand is 35 units. GFE orders this product in lot sizes of 2,000 and incurs a fixed order cost of $3,000 each time they place an order. A replenishment order is placed when the inventory position drops below 3,750 units.
The supplier uses an inter-modal method of transportation in which the shipment is transported to the US-Mexican border at Laredo, Texas via truck. At Laredo, after all customs paperwork and security clearances have been completed, the shipment is transferred onto a railcar and the product is transported to the rail terminal in Des Moines, IA. In Des Moines, the product is once again transferred to a truck for final delivery to the distribution center in Boone, IA. The time required from placing an order until the product is in stock at the distribution center and ready for sale, averages 10 days with a standard deviation of 3 days.
Proposed Alternative The GFE inventory management group arranged a meeting with the supplier for GNCD10GB along with the 3PL provider in order to collaborate on potential options for improving on the current distribution system. At this meeting the proposal is put forward that GFE consider trying to reduce its current average lead time. In particular, the 3PL provider felt that if GFE switched from the current inter-modal transport method to a quicker direct truck method, they could receive their shipments much sooner.
Although the inter-modal transport method is cheaper, the proposed direct truck method would cut the lead time to an average of 3 days with an estimated 1. 5 days standard deviation. However, the direct truck method would also increase the fixed order cost for GFE to $4,000. This was an additional $1,000 per order! Mr. Goldfield was expecting an overview of the current situation along with the team’s recommendations for improvement, the following week. The team was having trouble seeing how the reduction in lead time was worth paying the higher order cost. A tough decision had to be made.