CHAPTER 12 INVENTORY CONTROL MODELS

CHAPTER 12

INVENTORY CONTROL MODELS

Internet Case Study: Drake Radio

Drake
Radio got its start during World War I by manufacturing radio communications
equipment for the military. By the start of World War II, Drake was one of the
largest suppliers of military communications equipment. After World War II,
Drake diversified into the following three market areas:

Military
communications equipment
Amateur radio
equipment
CB radios and
equipment

Using
its technology and experience gained from manufacturing military communications
equipment, Drake became known as one of the best producers of amateur radio
equipment. Drake especially excelled with its single sideband radios and its
two-meter radios for amateur use. Although these radios were expensive, they were
of the finest quality and always in demand.

In
developing CB radios, however, Drake decided to mass produce cheap units that
would have a wide appeal and a low price. To help protect its good name in
military communications equipment and amateur (ham) radios, these inexpensive
CB radios were marketed under the brand name of Hustler.

In
1975, George Populas, the president of Drake Electronics, decided to
investigate the possibilities of entering into the market of home stereo
systems. These stereo systems would be high quality, highly priced, and
marketed with the Drake name. The most remarkable stereo system that Drake
manufactured was the DR-2000, which was a sophisticated stereo receiver. The
demand for the DR-2000 was fairly constant from month to month, with demands of
801, 807, 795, and 797 units in January, February, March, and April,
respectively.

The
DR-2000 had all the features of a stereo receiver that carried a price tag of
$765. Some of these features included the ability to connect four different
speaker systems, loudness control, flatness control, blend control, and
complete digital read out. Of course, it could be connected to one or more
receivers, tape units, turntables, and so on. Instead of having a bass control
to regulate the low frequencies and a treble control to regulate the high
frequencies, the DR-2000 had five separate controls that regulated five
frequency ranges. One control regulated frequencies from 0 to 500 Hz; another
control regulated frequencies from 500 to 5,000 Hz; a third regulated the
frequencies between 5,000 to 10,000 Hz; a fourth regulated frequencies between
10,000 to 15,000 Hz; and a fifth, the frequencies between 15,000 and 50,000 Hz.

One
of the biggest selling features of the DR-2000 was its ability to use the
DR-2000 RC, the remote control device for the stereo receiver. Because all of
the switching and components were solid state, the engineers of Drake
Electronics were able to develop a complete remote control station that was no
bigger than a cigarette pack. The basic idea for the remote control device was
borrowed from that of television, and Drake engineers were able to control all
functions by the DR-2000 RC. Each remote control box cost $75, and many people
purchased more than one unit. The ability to control the stereo system from
literally anywhere in a house was one of the system’s biggest selling features,
but it also caused some problems in homes with children. As a result, Drake
developed a master control unit that parents could keep and that would override
all other remote control units and the controls on the stereo receiver.

Another
outstanding feature of the DR-2000 was its completely modular design, shown in
Figure 1. Each module was contained in a completely separate, color coded box.
By unlatching four hidden slides, the top of the cabinet could be removed,
giving access to all of the modules.

Figure
1
.0/msohtmlclip1/01/clip_image002.jpg” alt=”Description: drake”>

The
control module contained a microprocessor chip that monitored the operations of
all of the other modules. If one of the modules stopped functioning correctly,
the control module would activate a warning light on the front panel that
indicated which module was not working properly. The owner could pull out the
appropriate module and replace it with a new module from a nearby Drake dealership.
If a Drake dealership was not close, Drake promised two-day, COD delivery. The
malfunctioning module could even be sent to Drake or given to a Drake
dealership to be repaired or for a refund.

All
of the modules, except the FM tuner, were manufactured by Drake and stored
until they were needed. Annual carrying cost was estimated to be 25 percent for
all modules. The FM tuner modules were supplied by Collins Electronics, which
also adjusted and sealed them. The cost to place an order was estimated at $50
per order, and the time to receive an order from Collins was approximately two
weeks. Collins also offered quantity discounts on its FM tuners, as shown in Table
1.

Table
1
Quantity Price
0 to 100 $25
101
to 500 $24
501
and over $22

Nitobitso
Electronics also manufactured FM tuners compatible with the DR-2000. Because of
its location in Japan, the time to receive an order was about two months, and
the ordering cost was $100 because of the additional required paperwork. The
quantity discounts offered by Nitobitso is shown in Table 2.

Table
2
Quantity Price
0 to
200 $25
201
to 800 $23
801
to 2,000 $22
2,001
and over $21

1. What is the reorder point for Collins and Nitobitso?

2. Would you recommend that Drake get FM tuners from Nitobitso? Explain
your answer.

3. Everything else being equal, which supplier of FM tuners would you
want with a fluctuating demand?