Week 3 Case: Franklin Fan Company

Inventory Management

Franklin Fan Company is a manufacturer and distributor of electric fans founded by two
disenchanted engineers, Dan Block and Ed Spriggs, one an electrical engineer, and the other a
mechanical engineer. Originally located in Block’s garage, the firm showed slow but steady
growth for seven years before it relocated to an old, abandoned meat-packing warehouse on
Chicago’s South Side. With increased space for inventory storage and manufacturing, the
company was able to begin offering an expanded line of fans. This increased selection, combined
with the trend for ceiling fans, led to an explosive growth of the business. Fifteen years later,
Franklin Fan was the largest independent manufacturer and distributor of fans in the north central
region.

Recently, Franklin Fan relocated to a sparkling new office, warehouse, and manufacturing
complex off Interstate 55 in suburban Chicago. The warehouse space alone occupies more than
100,000 square feet. Although only a handful of new products have been introduced since the
warehouse was constructed, the warehouse utilization increased from 65% to more than 90%
capacity. During this same time period, however, sales growth stagnated. These conditions
motivated Block and Spriggs to hire the first manager from outside the company in the firm’s
history.

It is June 6, Sue McCaskey’s first day in the newly created position of Materials Manager for
Franklin Fan. A recent graduate of a prominent business school, McCaskey is eagerly awaiting
her first real-world problem. At approximately 8:30 AM, this problem arrives in the form of
status reports on inventory and orders shipped. At the top of the extensive computer printout is a
handwritten note from Joe Donnell, the Purchasing Manager: “Attached you will find the
inventory and customer service performance data. Rest assured that the individual inventory
levels are accurate because we took a complete physical inventory count at the end of last week
during a weekend shutdown. Unfortunately, we do not keep compiled records in some areas as
you requested. However, you are welcome to do so yourself. Welcome aboard!”

A little upset that aggregate information is not available, McCaskey decides to randomly select a
small sample of approximately 100 items and compile inventory and customer service
characteristics to get a feel for the “total picture.” The results of this experiment reveal to her
why Franklin Fan decided to create the position she now fills. It seems the inventory is in all the
wrong places. Although an average of approximately 60 days of inventory is on hand, the firm’s
customer service level is inadequate. Franklin Fan tries to backorder the customer orders not
immediately filled from stock, but some 10% of demand is being lost to competing companies.

Derived from the Parts Emporium Case; Chapter 9; Page 343; Operations Management by Krajewski, Ritzman, & Malhotra
(10th) 2013 Page 1
Because stockouts are costly, relative to inventory holding costs, McCaskey believes that a
cycle-service level of at least 95% should be achieved.

McCaskey knows that although her influence to initiate changes will be limited, she must
produce positive results immediately. Thus, she decides to concentrate on two products from the
extensive product line: the CF151 ceiling fan and the PF032 personal fan. If she can demonstrate
significant gains from proper inventory management for just two products, perhaps Block and
Spriggs will give her the backing needed to change the total inventory management system.

The CF151 is manufactured in house. Actual demand for the last 21 weeks of this year is shown
in the following table.

Week Actual Demand Week Actual Demand

32 971 43 907
33 962 44 924
34 999 45 952
35 980 46 924
36 952 47 962
37 952 48 943
38 943 49 943
39 971 50 971
40 934 51 1,008
41 934 52 906
42 962

A quick review of past orders, shown in another document, indicates a lot size of 2,000 units is
being used and that the lead time is fairly constant at two weeks. Currently, at the end of week
52, no inventory is on hand, 102 fans are backordered, and the company is awaiting a scheduled
receipt of 2,000 fans.

The PF032 personal fan is also produced in house. Actual demand so far this year is shown in the
following table.

Week Actual Demand Week Actual Demand

42 346 48 962
43 635 49 1,019
44 1,019 50 1,038
45 1,038 51 942
46 981 52 1,000
47 1,019

Derived from the Parts Emporium Case; Chapter 9; Page 343; Operations Management by Krajewski, Ritzman, & Malhotra
(10th) 2013 Page 2
Because the product is new, data are available only since its introduction in week 42. Currently
2,243 personal fans are on hand, with no backorders and no scheduled receipts. A lot size of
15,000 personal fans is being used, with the lead time fairly constant at three weeks.

The wholesale prices that Franklin Fan charges its customer are $129.99 for the ceiling fan and
$19.99 for the personal fan. Because no quantity discounts are offered on these two highly
profitable items, gross margins based on current purchasing practices are 32% of the wholesale
price for the ceiling fan and 48% of the wholesale price for the personal fan.

Franklin Fan estimates its cost to hold inventory at 21% of the inventory investment. This
percentage recognizes the opportunity cost of tying money up in inventory and the variable costs
of taxes, insurance, and shrinkage. The annual report notes other warehousing expenditures for
utilities, maintenance, and debt service on the 100,000 square foot warehouse, which was built
for $1.5 million. However, McCaskey reasons that the warehousing costs can be ignored because
they will not change for the range of inventory policies she is considering.

Out-of-pocket costs for Franklin Fan to place an order for production are estimated to be $30.00
per order for all fans. On the outbound side the company can charge a delivery fee. Although
most customers pick up their items at Franklin Fan, some orders are delivered to customers. To
provide this service, Franklin Fan contracts with a local company for a flat fee of $50.00 per
order which is added to the customer’s bill. McCaskey is unsure whether to increase the ordering
costs for Franklin Fan to include delivery charges.

QUESTIONS
1. Put yourself in Sue McCaskey’s position and prepare a detailed report to Dan Block and
Ed Spriggs on managing the inventory of the CF151 ceiling fan and the PF032 personal
fan. Be sure to present a proper inventory system and recognize all relevant costs.

2. By how much do your recommendations for these two items reduce annual cycle
inventory, stockout, and ordering costs?

Derived from the Parts Emporium Case; Chapter 9; Page 343; Operations Management by Krajewski, Ritzman, & Malhotra
(10th) 2013 Page 3