CRU Computer Rentals

Team # 6

General Manager Richard Sarkis:

In preparation for the upcoming board meeting, we have analyzed the process of our operations from the return of a computer from our customers to the point that the units can be resent to new customers. We are including a diagram flow chart (Fig. 1) of this process herein as well as an IRT analysis (Table 1) of each of the buffers using last years numbers.

Figure 1: Flow Chart of receiving units through re-delivery

Table 1: IRT Chart

In Table 1 cell C-15, the number of units in inventory at any given time was calculated by the number of units per week (1,000) multiplied by the flow time (8 weeks), which gave us 8,000. Inventory units in the Suppliers storage as well as those available for rent were calculated the same way (derived from our known numbers from last years reports). In the cases where we knew the throughput and the inventory units, we could then calculate the Flow Time (row 19) in weeks, or columns D-G and I-J. All of these calculations were a function of Littles Law, or R*T = I (Rate multiplied by Time equals Inventory). In addition, CRUs computer inventory

was calculated by adding up the inventory units in customer, receiving, status 24, status 40, status 41, status 42 and status 20 categories to get a total of 14,405 computers. This gave the basis for analyzing your three ingenious proposals, or options for increasing revenues through improved processes. If we assume that the inventory numbers will remain as they were last year, the three proposed options are broken down in Table 2.

Table 2: Options Differentiation Chart with inventory buffers constant (compared to previous year)

From this we see that option A reduces the amount of time a unit spends on average in our facility, and hence allows more units to be in our customers hands. The reduction in flow time was approximately 20% (6.35 weeks, down from 8.00). Therefore, option A appears to be the best choice using these numbers as well as the net profit results shown in Table 3. Option A (the highest yield) would generate weekly revenue in the amount of $46,500.00 while option C (the lowest yield) generated only $30,750.00 per week. Option B was in between the two at

$39,000.00. Thus, the annual revenue generated for A, B, C, was $2,418,000.00, $2,028,000.00 and $1,599,000.00 respectfully.

Table 3: Financial breakdown of Options A, B, and C.

Table 3 shows the weekly revenue generated by Option A, B, C, which was calculated by taking total market demand for each of the three categories (4 weeks, 8 weeks, and 12 weeks) and multiplying the percentage of the market to be captured by CRU computers for each of the three options to get the number of computers rented weekly in each category. Next, the weekly revenue for the 4 weeks category, which was $40, the 8 weeks category which was $30, and for the 12 weeks category, which was $25, were multiplied by the weekly computers rented in each category to get the total weekly revenue. The category totals were added together to get the weekly revenue. The total weekly revenue was multiplied by 52 (weeks) to get the annual revenue generated.

In table 4 the same analysis was run, only this time the flow time was held constant.

Table 4: Options Differentiation Chart with time constant (compared to previous year)

From table 2 we see that CRU currently has 14,405 computers in their inventory and would need to buy 520 computers to reach the required inventory of 14,925 computers for option A. Option B would require the company to purchase 240 computers to reach 14,645 computers. And finally, for option C the company would have to sell 100 computers less deprecation (1,000.00 divided by 36 months = 27.77 per month) to get to the required computers needed of 14,305. Thus, if the computers were one year old, the 100 computers should sell for $666.67 each or a total of $66.667.00. Consequently, net income after the purchases for A and B and the

sell for option c, the total revenue would be $1,898,000.00, $1,788,000.00, and $1,665,667.00 respectively. If we are fairly certain that inventories will remain constant then option A is still the best choice. However, from table 4 we see that if the flow time remains constant for this year as compared to last we learn that an additional 3,738 computers for option A would be needed and with option B an additional 1,722 units would be needed. The difference in net profit, as shown in table 3, would not compensate for this need of increased inventory, so option C is our recommendation if time is the carry-over consistency from last year. This is also due to the fact that we would have more units than we would need (13,680 as compared to 14,405 currently on hand) and could sell our 726 excess units to increase our net profits. Consequently, the net revenue would be a loss of $1,320,000 for option a, gain of $306,000.00 for option b, and a gain of $2,083,002.42 for option c. Therefore, Mr. Sarkis, we propose that option C be the course of our sales marketing segmentation efforts, unless we can be certain that inventory remains constant, then option A would be most profitable due to the decrease in time flow.

Sincerely, Team #