CHAPTER 12 INVENTORY CONTROL MODELS Internet Case Study – Drake Radio

CHAPTER 12INVENTORY CONTROL MODELSInternet Case Study: Drake RadioDrake Radio got its start during World War I by manufacturing radio communications equipment for themilitary. By the start of World War II, Drake was one of the largest suppliers of military communicationsequipment. After World War II, Drake diversified into the following three market areas:Military communications equipmentAmateur radio equipmentCB radios and equipmentUsing 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 excelledwith its single sideband radios and its two-meter radios for amateur use. Although these radios wereexpensive, 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 wideappeal 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 ofentering into the market of home stereo systems. These stereo systems would be high quality, highlypriced, and marketed with the Drake name. The most remarkable stereo system that Drake manufacturedwas the DR-2000, which was a sophisticated stereo receiver. The demand for the DR-2000 was fairlyconstant 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 thesefeatures 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 atreble control to regulate the high frequencies, the DR-2000 had five separate controls that regulated fivefrequency ranges. One control regulated frequencies from 0 to 500 Hz; another control regulatedfrequencies from 500 to 5,000 Hz; a third regulated the frequencies between 5,000 to 10,000 Hz; a fourthregulated frequencies between 10,000 to 15,000 Hz; and a fifth, the frequencies between 15,000 and50,000 Hz.One of the biggest selling features of the DR-2000 was its ability to use the DR-2000 RC, the remotecontrol device for the stereo receiver. Because all of the switching and components were solid state, theengineers of Drake Electronics were able to develop a complete remote control station that was no biggerthan 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 fromliterally anywhere in a house was one of the system’s biggest selling features, but it also caused someproblems in homes with children. As a result, Drake developed a master control unit that parents couldkeep 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. Eachmodule was contained in a completely separate, color coded box. By unlatching four hidden slides, thetop of the cabinet could be removed, giving access to all of the modules.Figure 1The control module contained a microprocessor chip that monitored the operations of all of the othermodules. If one of the modules stopped functioning correctly, the control module would activate awarning light on the front panel that indicated which module was not working properly. The owner couldpull out the appropriate module and replace it with a new module from a nearby Drake dealership. If aDrake dealership was not close, Drake promised two-day, COD delivery. The malfunctioning modulecould 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 weresupplied by Collins Electronics, which also adjusted and sealed them. The cost to place an order wasestimated 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 1Quantity0 to 100101 to 500501 and overPrice$25$24$22Nitobitso Electronics also manufactured FM tuners compatible with the DR-2000. Because of its locationin Japan, the time to receive an order was about two months, and the ordering cost was $100 because ofthe additional required paperwork. The quantity discounts offered by Nitobitso is shown in Table 2.Table 2Quantity0 to 200201 to 800801 to 2,0002,001 and overPrice$25$23$22$211. 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?