CRU Computer Rentals
(Operational Management Assignment)
CRU is one of the two national computer rental companies. They purchase CPU, monitor, printer and other peripherals and rent them out for long term leases and short term rentals. The case covers the problem faced by the company in 1997 when the rental market started to decline and the efforts by the company to bring up the sales plunged the company to losses.
In 1996, they had a revenue of 15 million$ and the average number of units that were on rent was at 1000 units per week.
But at the beginning of 1997, the rental market began to decline and the demand fell down to 600units per week at ...view middle of the document...
1) As part of 1997 sales drive, 800 units were given out for rent at a rate of 35$ per week and also 600 units were given out for rent at a rate of 30$ per week.
* Revenue per unit that is given out for 4 weeks = 35 * 4 = 140$
* Cost per unit that is given out for 4 weeks.
* Cost of a part that got returned as faulty = 25 + 25 + 4 * 1000/156 + 150 = 225.64
* Cost of a part that got returned fine = 25 + 25 + 4 * 1000/156 = 75.64
* Considering that (70 – 10.5)% units return as faulty and (30 + 10.5)% units returned fine, the average cost per unit given out for rental is ~139$
* Contributed Margin is just 1$. Again, with more units given out for rent, the total number of items in inventory rises as the flow time is kept constant. This adds to average depreciation cost and net effect will be a loss.
Hence the reduction in rental rate of 4 week unit from 40$ to 35$ was not correct.
Going by the actual rental rates of each unit,
* Average profit per week per unit that goes for a 4 week rent = (40*4 – 139)/4 ~ 5$ per week
* Average profit per week per unit that goes for a 4 week rent = (30*8 – 164.41)/8 ~ 9.45$ per week
* Average profit per week per unit that goes for a 4 week rent = (25*12 – 190.05)/12 ~ 9$ per week
This shows that more reduction in rate is possible for an 8 week or a 12 week CRU unit when compared to a 4 week unit. So, mere increases in utilization rate alone won’t be a performance measure if there is more reduction in rate given to a particular rental set of units.
2) As the analysis done for (1) says, a major cost per unit of rent comes when somebody returns a faulty part (150$ per unit). Hence special offers can be provided to clients who return back the units in good condition compared to those who return back goods in the faulty state.
3) As the throughput increases, inventory also increases if the flow time is kept constant. In 1997 when the sales drive was attempted, the flow time was kept constant. As a result, when the throughput increased, the inventory increased. This increased the total depreciation cost and that brought down the net profits.
Little’s law states that Inventory = Throughput * Flow Time. Hence flow time needs to be reduced whenever throughput is increased to bring down the Inventory and thus reduce depreciation costs.
4) Reduce different buffer sizes to the minimum so that the overall cost of depreciation decreases and profit increases.
1) Assuming that operations will be able to ensure that all buffer sizes are the same as they were in 1996 for all the three options.
(a)Option 1 (Capture 60% of 4 week market, 30% of 3 week market, 10% of 12 week market)
| Customer | Receiving | Status 24 | Status 40 | Status 41 | Status 42 | Status 20 |
Throughput (units/week) | 900+300+60 = 1260 | 1260 | 882 | 378+132 = 510 | 510 | 510 | 1260 |
Inventory (units) | 6720 | 500 | 1500 | 1000 | 905 | 500 |...