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omgt410 - operations management ii - case study 5

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Running Header: Custom Vans, Inc.
1
Case Study: Custom Vans, Inc.
Christopher A. Smiley
OMGT410 – Operations Management II
December 8, 2012
Instructor - Bruce Stephens
Southwestern College Professional Studies
Custom Vans, Inc.
2
The Situation
In this case study, we learn about Tony Rizzo, owner and founder of Custom Vans, Inc.
He started a customization shop for vans, where people spend thousands of dollars to have their
vans customized with unique features and devices. One of his most popular features is the
Shower-Rific, a fiberglass shower unit that attaches to a van. Tony’s business has done so well
in the mid-west, that he has expanded his customization shops to four different U.S. cities,
Chicago, Milwaukee, Minneapolis, and Detroit. The shower units are in such demand that Tony
has had to expand his Shower-Rific production to two different factories, one in Gary, Indiana
and the other in Fort Wayne, Indiana. Unfortunately, the two factories together are no longer
able to meet the increasing demand of his four customization shops.
The Problem(s)
Tony Rizzo is faced with the increasing need to expand his business to include two
additional factories that will produce and ship Shower-Rifics to his four customization shops.
Right now, his factories in Gary and Fort Wayne are able to produce 450 Shower-Rifics a month.
This is three hundred units shy of the company’s need between the four customization shops,
Chicago, Milwaukee, Minneapolis, and Detroit.
He has the money to establish two more
factories, each capable of producing an additional 150 Shower-Rific units. This will meet the
current demand, but he still faces the decision as to where to establish the new factories.
Tony has located three potential locations to establish his two new factories, Detroit, MI,
Rockford, IL, and Madison, WI. His decision will be based on shipping costs. Each location
Custom Vans, Inc.
3
provides a different shipping cost to each of the customization shops. Tony and his associates
must determine which two of the three locations will be most cost efficient for his operation.
The Critical Factor(s) Bearing on the Problem(s)
Tony Rizzo must look into the current shipping costs as well as potential shipping costs
at each of the potential factory sites. The current need for Shower-Rifics has reached 750 units
per month. Right now, Tony’s factories are only able to produce 450 units; 300 shy of the
monthly need. Some of his customization shops have been ignored due to high shipping costs,
so placing the new factories close to these areas would be beneficial.
The three potential new factory locations each have different costs associated with
shipping to each of the customization shops. Detroit has an additional variable due to the option
of being able to purchase fiberglass at $2 less per gallon. This added value must be taken into
consideration. In Madison, WI, local college students are willing to work for $1 less per hour
than the average worker.
This adds up to savings.
Regardless of these two savings
opportunities, Tony must still take all factors into consideration, to include shipping costs.
The Discussion of Possible Solutions
The following transportation models were created by Tony. These models depict the best
case shipping solutions for each of the three possible combinations of two factory sites. In
addition to shipping costs, Tony also took into consideration the money saved in Detroit and
Madison.
Custom Vans, Inc.
4
Chicago, IL
Milwaukee, WI
Minneapolis, MN
Detroit, MI
Gary, IN
10/250
20
40
25/50
300
Fort Wayne, IN
20
30
50
15/150
150
Detroit, MI
30
40
60
5
150
Rockford, IL
5/50
10/100
30
35
150
Madison, WI
10
5
25/150
40
150
300
100
150
200
$2,750
$1,000
$3,750
$3,500
11000
Discount
Chicago, IL
Milwaukee, WI
Minneapolis, MN
Detroit, MI
Gary, IN
10/300
20
40
25
300
Fort Wayne, IN
20
30/100
50
15/50
150
Detroit, MI
30
40
60
5/150
150
Rockford, IL
5
10
30
35
150
Madison, WI
10
5
25/150
40
150
300
100
150
200
$3,000
$3,000
$3,750
$1,500
11250
Chicago, IL
Milwaukee, WI
Minneapolis, MN
Detroit, MI
Gary, IN
10/300
20
40
25
300
Fort Wayne, IN
20
30
50/100
15/50
150
Detroit, MI
30
40
60
5/150
150
Rockford, IL
5
10/100
30/50
35
150
Madison, WI
10
5
25
40
150
300
100
150
200
$3,000
$1,000
$6,500
$1,500
12000
Madison = $750
Total = $10250
Discount
Madison = $750
Detroit = $600
Total = $9900
Discount
Detroit = $600
Total = $11400
The Recommended Solution
As we can see from the transportation models, new factories in Detroit, MI and Madison,
WI would be the best areas for establishing two new factories. The top transportation graph
displays the cheapest shipping scenario, but as we apply both discounts in Detroit and Madison,
the second solution will prove to be most cost effective.
In all three alternatives, factories in at
least one location would have to ship Shower-Rifics to two separate locations. This is not
always ideal for bulk shipments, but is a must in order to meet the need for all customization
shops.
The Reason(s) for the Recommended Solution
Building new factories in Detroit, Michigan and Madison, Wisconsin will be the most
cost efficient choice for Custom Vans, Inc. The shipping costs came down to a difference of
Custom Vans, Inc.
5
$1000 between the best alternative and the worst alternative. The deal maker came down to the
discounts experienced at the Detroit and Madison factory sites. With the chosen alternative, the
most costly shipping location will be those Shower-Rifics being shipped from Fort Wayne,
Indiana to Milwaukee, Wisconsin at $30 per unit.
The action(s) required
Tony Rizzo should build his new factories in Detroit, Michigan and Madison, Wisconsin.
The key to making this alternative the most efficient is taking advantage of the discounted
fiberglass in Detroit and the cheaper labor in Madison. Without these discounts, this alternative
is $1000 more than the first alternative, Rockford and Madison.
Custom Vans, Inc.
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References
Heizer J., Render B. (2008). Operations management w/CD & student DVD, 10th edition.
Upper Saddle River, NJ: Prentice Hall.
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