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. 6 References Heizer J., Render B. (2008). Operations management w/CD & student DVD, 10th edition. Upper Saddle River, NJ: Prentice Hall.