Burns Auto Corporation owns 25 car dealerships in the western United States. Tom Burns, a former athlete built the company over a five year period with the help of his friend, Richard Settle. Richard has an extensive background in the automotive industry and has used his knowledge and intuition to guide the company into the success that it is today.
Even though the economy is strong, Burns' profits are being impacted by an increase in average inventory levels which has risen over the past two years from $300 million financed at an annual at a rate of 3% to $360 million financed at the same annual rate. Therefore, the cost to finance this inventory has risen from $9 million to $10.8 million per year. The firm's inaccurate sales forecasting methodology has led to the increased inventory levels and the subsequent increase in cost of inventory. Further, a new "turn and earn" approach to managing inventory initiated by the manufacturers will begin in eight months.
A dealership will only receive new inventory at the rate it sells. The need for accurate sales predictions is compounded by this new model because:
* Adequate inventory levels depend on accurate forecasts for demand because additional inventory is dependent upon sales.
* Too much inventory results in excess inventory and will negatively impact profits (costs of carrying excess inventory).
Based upon the situation discussed in the preceding section and as outlined in Table 1 some of the major issues Burns faces are:
* Excess inventories are draining profits.
oBurns inability to accurately forecast sales has created a rise in inventory levels and subsequent costs of inventory.
oGreater difference between actual and projected sales.
oExcess inventory affects the firm's relationship with manufactures.
*Uncertainty about sales forecast accuracy.
oRichard Settle has relied upon secondary forecasting...