Description

Raritan Tool Company

The Raritan Tool Company is a leading producer of home tools ranging from hammers, pliers, screwdrivers, and wrenches to electric drills and other power tools. The tools are sold in four different product lines ranging from the top-of-the-line Atlas products, which are rugged tools for the toughest jobs, to the DIY Helper products, which are economy tools for the occasional user. The market for home tools is extremely competitive because of the simple makeup of the products and the large number of competing producers. Customers include some large retailers and a wide range of stores supplied by a variety of distributors.  Sales are very concentrated around a few months, when retailers purchase supplies before the holiday season and the start of spring. These factors compel Raritan Tool to maintain low prices while retaining high quality and dependable, on-time delivery. 

Home tools represent a mature industry. Unless a new tool is developed, or there is a sudden resurgence in home maintenance due to a temporary tax incentive, large increases in sales are not likely. It is a constant battle to keep ahead of the competition. Price and brand name are important factors, but the critical aspect in securing orders from distributors and retailers is on-time delivery. No one knows this better than Carole Smith, president of Raritan Tool. She started with the company as a sales representative 25 years ago and lived through the early years of rapid growth, which now has leveled off. The tools sold today are by-and-large the same ones sold 25 years ago give or take a few enhancements in design. The only way to generate new sales and retain old customers is to deliver superior customer service and provide a product with high customer value. This puts pressure on the manufacturing system, which Smith thought was having difficulties for a while. Recently she has been receiving calls from long-time customers, such as Home Depot and Tru-Value Hardware Stores, complaining about late shipments. These customers advertise promotions for home tools and thus on-time delivery is the key competitive factor.

Carole knew that performance had to improve and quickly − losing customers like Home Depot and Tru-Value would be disastrous. She decided to ask consultant Karen Cortez to investigate the matter and report to her in one week. Carole suggested that she focus on the electric drills as a case-in-point since it is a high-volume, mid-price product that has been a major source of customer complaints of late.

Planning the Production of Electric Drills

Electric drills come in three models and have a variety of attachments. Each model shares the same basic elements and assembly is essentially the same except for the size of some of the components, special features, and final packaging. For purposes of production, planning is done in aggregate for the entire family electric drills. Karen decided to find out how Raritan Tool planned the production of the electric drills. She went straight to Stephen Williams, the production planner, who gave the following account.

STEPHEN:

Because we are an old company, planning is a little informal around here. Until two years ago, marketing determined the forecasts of electric drills for the following year month by month, and then they passed them along to me. Quite frankly, their forecasts were so inflated that I automatically reduced them by 10 to 20% − it must be their big egos over there.

KAREN:

What?! Do you do cut their forecasts automatically? Without telling them? By 20 percent?!

STEPHEN:

Of course. We had such high inventories in the past that we usually ran out of space to store the extra production. We have to be careful because we enter into long-term purchasing contracts for steel and components, and it is expensive to have the inventory just sitting around. Plus, long production runs prevent us from producing a variety of other products on time.

KAREN:

But why are then customers complaining about late and missed deliveries?

STEPHEN:

Two years ago, we stopped producing a fixed quantity every month to be more responsive to the “ups” and “downs” of sales throughout the year. Now instead of using the forecasts provided by marketing, I use our own forecasts which are based on the actual shipments to the sales division (see Table 1). It is pretty simple: first we forecast the annual shipments with a linear trend model and then we calculate the monthly shipments based on the average percentage of each month in the previous four years. The system is working very well for us and the average inventory came down significantly.

KAREN:

But Marketing still complaints and says that they are late with customer orders, particularly at the end of the year.

STEPHEN:

Their shipment requests are so random, from having no orders months in a row to months when their orders vastly exceed our production capacity. I would not trust anything they tell you.