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CRU Computer Rental Case Solution

Team Members -

Akash Vora Garima Patidar Nikhil Ghodki Nupur Mungikar Sankaran Gopalakrishnan

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Q. 1. What was the utilization achieved by CRU in 1996? Solution: Until the year 1996, the important performance metric used to analyze the performance of the organization was utilization. CRU has a rent based business model for Computers. The margins were proportional to number of rented computers. The more the rented computers, more the margins. Inventory on Rent: It is the product of the # of units being rented/week and average #of weeks a unit is for rent. So, we have the following =1000*8 =8000 units As per Little’s Law Customer

Receiving

Status 24

Status 40

Parts

Supplier

Status 41= parts + supplier

Status 42

Status 20

I= R * T

8000

500

1500

1000

500

405

905

500

2000

R = I/T

1000

1000

700

405

405

405

405

405

1000

T=I/R

8

0.5

2.14

2.47

1.23

1

2.23

1.23

2

Total Inventory= 8000 + 500 + 1500 + 1000 + 905 + 500 + 2000 = 14405 Utilization = Inventory on rent / total inventory = 8000 / 14405 = 55%

Q.2. For 1996, calculate the average time spent by a unit in each buffer. Solution: By applying Little’s Law, we get T = I/R Customer

Receiving

Status 24

Status 40

Stored Orders

Orders at Suppliers

Status 41

Status 42

Status 20

Throughput (Units/Week)

1000

1000

1000*.70 =700

1000*.30+ .15*700= 405

405

405

405

405

1000

Inventory (Units)

8000= 8*1000

500

1500

1000

500

405= 405*1

500+405 = 905

500

2000 = 2*1000

Flow Time(Weeks)

8

0.5= 500/1000

2.14= 1500/700

2.46=1000/405

1.23= 500/405

1

2.23

1.23= 500/405

2

2

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Thus, the average time spent by a unit in each Buffer is shown in the table below: Average Time (WEEKS) Customer

8

Receiving

0.5

Status 24

2.14

Status 40

2.46

Stored Orders Orders at Suppliers Status 41

1.23

Status 42

1.23

Status 20

2

1 2.23

Q.3. Calculate the average weekly contribution margin (revenues - variable costs) to CRU in 1996. Ignore labor and facility costs in this calculation. We assume that they are fixed. How does the contribution margin compare with the weekly depreciation? Solution: Shipping cost per computer unit that CRU has to incur: $25 This cost is borne by CRU both during sending and receiving unit to the customers. Average material cost for converting Status 24 to status 20 for rent: $4 Status 24: Non-Defective computer Status 20: Available for Rent Average part cost to repair a defective unit (Status 40): $150 Units/week of Demand: 1000 405 units are classified for repair and 595 units undergo status change from Status 24 to Status 20. Thus, weekly variable cost is as follows: Weekly Variable Costs = Throughput × Cost = 1,000 × $25 + 1,000 × $25 + 595 × $4 + 405 × $150 = $113,130 CRU generates $30/ week from each computer unit it rents. Thus, Weekly Revenue=Number of units on Rent × Rental Price =8,000 × $30 =$240,000 3

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Weekly Contribution Margin = $240,000-$113,130 = $126,870 Computer units in CRU has a depreciation of 3 years. Hence, the weekly depreciation is as follows: Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (14,405 * $1000) / ((36/12) * 52) = $ 92339.74 We can see that the weekly depreciation is almost near to contribution margin generated. Thus, there is not much of a net profit obtained if weekly depreciation is deducted from weekly contribution margin. Q. 4. What do you think about the decision to launch a sales drive in 1997? If you had a chance to advise Richard, what actions would you suggest Richard focus on to improve performance at CRU (give a concrete plan listing the resulting benefits)? What are key performance measures that he should focus on? Solution: For this problem we can compare the profits generated after company had launched sales drive to the profit generated if the company didn’t opt to use sales drive. Therefore, there will be two cases: Case 1: Demand increases to 1400 units per week and time flow is same (with Sales Drive) Customer

Receiving

Status 24

Status 40

Stored Orders

Orders at Suppliers

Status 41

Status 42

Status 20

Throughput(Units/Week)

1400

1400

980

1400*.30+ .15*980= 567

567

567

567

567

1400

Inventory(Units)

8000

1400*.5 =700

980*2.14 =2097

567*2.46 =1400

567*1.23 =697

567*1 =567

567*2.23 =1264

567*1.23 =697

1400*2 =2800

Flow Time(Weeks)

8000/1400 = 5.71

0.5

2.14

2.46

1.23

1

2.23

1.23

2

It is given those 600 units out of 1400 were rented for 8 weeks and remaining 800 units for 4 weeks. Revenue = 600*8*30 + 800* 4* 35 = 256000 Variable cost = 2*25*1400 + 4*980*.85 + 150*567= 158382 St. Line Dep. = 16958*1000/156= 108705 Profit = 256000-158382-108705= $-11087 (LOSS) Case 2: Demand is 600 units per week and flow time is same (without sales drive) 4

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Customer

Receiving

Status 24

Status 40

Stored Orders

Orders at Suppliers

Status 41

Status 42

Status 20

Throughput (Units/Week)

600

600

600*.70 =420

600*.30+420*.15 =243

243

243

243

243

600

Inventory (Units)

600*8 =4800

600*.5 =300

420*2.14 =898

243*2.46 =597

243*1.23 =298

243*1 =243

243*2.23 =541

243*1.23 =298

600*2 =1200

Flow Time (Weeks)

8

0.5

2.14

2.46

1.23

1

2.23

1.23

2

Revenue = 600*8*30= 144000 Variable cost = 2*25*600 + 4*420*.85+ 150*243 = 67878 St. Line Depreciation= 8634*1000/156= 55346 Profit = 144000-67878-55346= $ 20782 (GAIN) Above results shows that the sales drive was not very effective. Recommendations: I would suggest following recommendations to Richard for improving performance at CRU 1. Capturing market for longer period. 2. Buffer time between status 40 or 24 to status 20 is 2 weeks. This buffer time should be decreased, in order to have maximum inventory utilization. So that company do not need to purchase more units to the inventory and can meet the demand of 1400 units per week. Key Performance Measures 1. Utilization rate 2. Average time spent in inventory 3. Throughput

5

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Q. 5. Exhibit 2 contains the pricing scheme used by CRU. Richard has to decide on how the sales effort is to be assigned among the various market segments (represented by duration of rental). There are three options that have been suggested by the VP of sales and a decision has to be made. The three options have the following outcomes: · Capture 60% of the 4 week market, 30% of the 8 week market and 10% of the 12 week market · Capture 40% of the 4 week market, 40% of the 8 week market and 20% of the 12 week market · Capture 20% of the 4 week market, 50% of the 8 week market and 25% of the 12 week market (i) Assume that Operations will be able to ensure that all buffer sizes are the same as they were in 1996 for all three options (status 20 buffer continues at 2 weeks). Which of the three options would you recommend? Why? Solution: The buffer sizes are same as they were in 1996 for all three options. Thus the number of computers rented/week: Alternative 1: 0.6*1500 + 0.3*1000 + 0.1*600 = 1260 Alternative 2: 0.4*1500 + 0.4*1000 + 0.2*600 = 1120 Alternative 3: 0.25*1500 + 0.5*1000 + 0.25*600 = 1025 Buffer sizes correspond to inventory and hence the inventory is same as it was in 1996. The average rental term (T) for 1996 was 8 weeks. Average number of units rented/week in 1996 = 1000. Thus, Average Inventory for 1996 = I * R = 8 * 1000 = 8000 units From the case, we get the following information: Units waiting to be received = 500 Units in status 40 = 1,000 Units in status 24 = 1,500 Units in status 42 = 500 Alternative 1: Capture 60% of the 4 week market, 30% of the 8 week market and 10% of the 12 week market CRU policy required that inventory to cover about 2 weeks demand be available for rent in status 20 at all times. Thus T = 2 weeks, R = 1260 units/week and hence Inventory I = R * T = 2520

6

CRU Computer Rental Case KEL017-PDF-ENG Group 06

Throughput(R) Units/Week Inventory(I) Units Flow Time(T) = I/R Weeks

Customer

Receiving

Status 24

1260

1260

= 0.7 * 1260 = 882

8000

500

1500

6.349

0.396

1.7

Status 40 = 0.3 * 1260 + 0.15 * 882 = 510

Parts

Suppliers

Status 41

Status 42

Status 20

510

510

510

510

1260

1000

500

405

905

500

2520

1.96

0.98

0.794

1.774

0.98

2

Total inventory units for Alternative 1: 8000 + 500 + 1500 + 1000 + 905 + 500 + 2520 = 14925 Number of Units on rent = 8000 Total Number of Units = 14925 Utilization = 8000/14925 = 53.60% Revenue Rate = (900 * 40 + 300 * 30 + 60 * 25) * 52 = $2418000 Variable Costs = Throughput × Cost = (2 * 25 * 1260) + (4 * 882 *0.85) + (150 * 510) = $142,498.8 Contribution Margin = 2418000 – 142498.8 = $2275501.2 Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (14,925 * $1000) / ((36/12) * 52) = $95673.07 Profit = 2275501.2 – 95673.07 = $2179828.13 The company will have to buy 520 units to keep inventory that could satisfy 2 weeks of demand. Thus, Profit = 2179828.13 – 520000 = $1660328.13 Alternative 2: Capture 40% of the 4 week market, 40% of the 8 week market and 20% of the 12 week market CRU policy required that inventory to cover about 2 weeks demand be available for rent in status 20 at all times. Thus T = 2 weeks, R = 1120 units/week and hence Inventory I = R * T = 2240

Throughput(R) Units/Week Inventory(I) Units Flow Time(T) Weeks

Customer

Receiving

Status 24

1120

1120

= 0.7 * 1120 = 784

8000

500

1500

7.142

0.446

1.913

Status 40 = 0.3 * 1120 + 0.15 * 784 = 454

Parts

Suppliers

Status 41

Status 42

Status 20

454

454

454

454

1120

1000

500

405

905

500

2240

2.202

1.101

0.892

1.993

1.101

2

7

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Total inventory units for Alternative 2: 8000 + 500 + 1500 + 1000 + 905 + 500 + 2240 = 14645 Number of Units on rent = 8000 Total Number of Units = 14645 Utilization = 8000/14925 = 54.62% Revenue Rate = (600 * 40 + 400 * 30 + 120 * 25) * 52 = $2028000 Variable Costs = Throughput × Cost = (2 * 25 * 1120) + (4 * 784 *0.85) + (150 * 454) = $126,765.6 Contribution Margin = 2028000 – 126765.6 = $1901234.4 Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (14,645 * $1000) / ((36/12) * 52) = $93878.20 Profit = 1901234.4 – 93878.2 = $1807356.2 The company will have to buy 240 units to keep inventory that could satisfy 2 weeks of demand. Thus, Profit = 1807356.2 – 240000 = $1567356.2 Alternative 3: Capture 25% of the 4 week market, 50% of the 8 week market and 25% of the 12 week market CRU policy required that inventory to cover about 2 weeks demand be available for rent in status 20 at all times. Thus T = 2 weeks, R = 950 units/week and hence Inventory I = R * T = 1900

Throughput(R) Units/Week Inventory(I) Units Flow Time(T) Weeks

Customer

Receiving

Status 24

1025

1025

= 0.7 * 1025 = 717.5

8000

500

1500

7.804

0.487

2.09

Status 40 = 0.3 * 1025 + 0.15 * 717.5 = 415.125

Parts

Suppliers

Status 41

Status 42

Status 20

415.125

415.125

415.125

415.125

1025

1000

500

405

905

500

2050

2.408

1.204

0.975

2.18

1.204

2

Total inventory units for Alternative 3: 8000 + 500 + 1500 + 1000 + 905 + 500 + 2050 = 14455 Number of Units on rent = 8000 Total Number of Units = 14455 Utilization = 8000/14305 = 55.34% Revenue Rate = (375 * 40 + 500 * 30 + 150 * 25) * 52 = $1755000 Variable Costs = Throughput × Cost

8

CRU Computer Rental Case KEL017-PDF-ENG Group 06 = (2 * 25 * 1025) + (4 * 717.5 *0.85) + (150 * 415.125) = $115958.25 Contribution Margin = 1755000 – 115958.25 = $1639041.75 Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (14,455 * $1000) / ((36/12) * 52) = $92660.25 Profit = 1639041.75 – 92660.25 = $1546381.5 The company will have to buy 50 units to keep inventory that could satisfy 2 weeks of demand. Thus, Profit = 1546381.5 - 50000 = $1496381.5 Thus, Alternative 1 was the most profitable when buffer is kept constant. Table below compares the profits for all the options: (ii) Assume that Operations will be able to ensure that the time spent in all buffers is the same as it was in 1996. Which of the three options would you recommend? Why? Solution: The time spent in each buffer is same as it was in 1996 for all three options. Thus the number of computers rented/week: Alternative 1: 0.6*1500 + 0.3*1000 + 0.1*600 = 1260 Alternative 2: 0.4*1500 + 0.4*1000 + 0.2*600 = 1120 Alternative 3: 0.2*1500 + 0.5*1000 + 0.25*600 = 950 From the case, we get the following information: Units waiting to be received = 500 Units in status 40 = 1,000 Units in status 24 = 1,500 Units in status 42 = 500 Average Time in each buffer in 1996: The average rental term = 8 weeks. Average Flow Time for receiving = 500/1000 = 0.5 Average Flow Time in Status 24 = 1500/700 = 2.14 Average Flow Time in Status 40 = 1000/405 = 2.47 Average Flow Time in Status 42 = 500/405 = 1.23 Average Flow Time in Status 20 = 2

9

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Alternative 1: Capture 60% of the 4 week market, 30% of the 8 week market and 10% of the 12 week market Customer

Receiving

Status 24

Throughput(Units/Week)

1260

1260

= 0.7 * 1260 = 882

Inventory(Units)

10080

630

1887

Status 40 = 0.3 * 1260 + 0.15 * 882 = 510 1260

Flow Time(Weeks)

8

0.5

2.14

2.47

Parts

Suppliers

Status 41

Status 42

Status 20

510

510

510

510

1260

627

510

1137

627

2520

1.23

1

2.23

1.23

2

Total inventory units for Alternative 1: 10080 + 630 + 1887 + 1260 + 1137 + 627 + 2520 = 18,141 Number of Units on rent = 10080 Total Number of Units = 18,141 Utilization = 10080/18141 = 55.56% Revenue Rate = (900 * 40 + 300 * 30 + 60 * 25) * 52 = $2418000 Variable Costs = Throughput × Cost = (2 * 25 * 1260) + (4 * 882 *0.85) + (150 * 510) = $142,498.8 Contribution Margin = 2418000 – 142498.8 = $2275501.2 Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (18141 * $1000) / ((36/12) * 52) = $116288.46 Profit = 2275501.2 – 116288.46 = $2159212.74 The company will have to buy 3738 units to maintain the requirement. Thus, Profit = 2159212.74 – 3738000 = $1578787.26 LOSS

Customer

Receiving

Status 24

Throughput(Units/Week)

1120

1120

= 0.7 * 1120 = 784

Inventory(Units)

8960

560

1677

Status 40 = 0.3 * 1120 + 0.15 * 784 = 454 1120

Flow Time(Weeks)

8

0.5

2.14

2.47

Parts

Suppliers

Status 41

Status 42

Status 20

454

454

454

454

1120

557

453

1011

557

2240

1.23

1

2.23

1.23

2

Total inventory units for Alternative 2: 8960 + 560 + 1677 + 1120 + 1011 + 557 + 2240 = 16125 Number of Units on rent = 8960 Total Number of Units = 16125 10

CRU Computer Rental Case KEL017-PDF-ENG Group 06 Utilization = 8960/16125 = 55.56% Revenue Rate = (600 * 40 + 400 * 30 + 120 * 25) * 52 = $2028000 Variable Costs = Throughput × Cost = (2 * 25 * 1120) + (4 * 784 *0.85) + (150 * 454) = $126,765.6 Contribution Margin = 2028000 – 126765.6 = $1901234.4 Weekly Depreciation = (Total Inventory * Purchase Price) / Time = (16125 * $1000) / ((36/12) * 52) = $103365.38 Profit = 1901234.4 – 103365.38 = $1797869.02 The company will have to buy 1732 units to maintain the requirement. Thus, Profit = 1797869.02 – 1732000 = $65869.02

Customer

Receiving

Status 24

Parts

Suppliers

Status 41

Status 42

Status 20

415.125

415.125

415.125

415.125

1025

1535

Status 40 = 0.3 * 1025 + 0.15 * 717.5 = 415.125 1025

Throughput(Units/Week)

1025

1025

= 0.7 * 1025 = 717.5

Inventory(Units)

8200

512

510

415

925

510

2050

Flow Time(Weeks)

8

0.5

2.14

2.47...