American Lightinig Products

AMERICAN LIGHTING PRODUCTS


"I just love challenges like this - take out 20 percent of our finished-goods inventory without hurting customer service. I don't know how we are going to do it!" Sue Smith exclaimed to inventory analyst Bryan White. Sue had just returned from a meeting with the vice president of finance who had issued the directive, and she now had to come up with a plan.BACKGROUND


Sue and Bryan work for American Lighting Products (ALP), a manufacturer of fluorescent lamps. AU) has two factories, both in Ohio. The Cleveland area plant produces the high-volume two-, three-, and four-foot lamps, with four-foot lamps accounting for 90 percent of the production. The Columbus area plant handles the low-volume types, ranging from six inches long to eight feet. Betweenboth plants, ALP offers over 700 product line items, through three main sales channels: commercial and industrial (C&I), consumer, and original equipment manufacturers (OEM). The C&I market has long been the mainstay of the business; however, with the emergence of home centres and deep discount merchants, the consumer channel is gaining in size and importance in the overall marketing strategy.The OEM market is small, but it is an important first step in the replacement market, since, as bulbs burn out, customers tend to purchase exactly what comes out of the fixture.

ALP is part of a larger corporation, American Electric Products (AEP), which manufactures a variety of other consumer and industrial products. Each division of AEP is run as a stand-alone business, and each fits into theoverall strategy of AEP in its own way. ALP is a mature industry that provides AEP with a steady income from its operations. While the division’s income earned is its primary measure of success, management also launches other major initiatives that focus on ways to increase the profitability of the corporation. The latest such initiative is a corporation-wide push to reduce inventories. Theenhanced cash flow to be gained from reducing inventory is seen as a critical factor to the company's overall profitability.

To Sue Smith and her team at ALP, the inventory initiative is a new challenge. In the past, the focus has been on making sure that the inventory levels were sufficient to cover the seasonal peaks in demand and to cover the plant's three-week summer shutdown. Until this point,the costs of inventory have not been closely monitored, so reducing the overall inventory level is a completely new idea.



THE DISTRIBUTION SYSTEM


ALP warehouses its finished goods inventory in eight master distribution centres (MDCs) located throughout the United States, each servicing sales for its entire region. MDC are located in Seattle, Los Angeles, Dallas, Kansas City, Chicago,Ravenna, and Hagerstown. Each plant ships product to MDCs in full truckload quantities of 35,000 lamps. Shipping in large quantities allows the plants' to manufacture product in economic lot sizes. Each plant schedules its production in weekly increments in order to minimise the impact of forecast errors that occur when production is based on monthly schedules.

Each MDC is set up as a hub tosupport its region, and the size of the centre is based on the size of the region served. For instance, the Hagerstown distribution centre serves the northeastern United States as well as European and Middle Eastern exports. This large region results in Hagerstown being the largest inventory location for ALP. On the opposite end of the scale is the Seattle distribution centre. It has the smallestregion to serve and, therefore, the smallest inventory allotment. Table 1 shows the annual shipments and inventory by MDC.

Master Distribution Centre Shipments (‘000) Inventory
Atlanta 26,070 3,784,333
Chicago 23,321 2,188,417
Dallas 13,244 2,159,250
Hagerstown 38,193 5,824,583
Kansas City 15,950 1,592,333
Los Angeles 21,470 3,666,500
Ravenna 25,853 2,918,250
Seattle 4,922 959,833
Table...