Question

Case Study - Custom Vans, Inc.

Custom Vans, Inc., specializes in converting standard vans into campers. Depending on the amount of work and customizing to be done, the customizing can cost from less than $1,000 to more than $5,000. In less than 4 years, Tony Rizzo was able to expand his small operation in Gary, Indiana, to other major outlets in Chicago, Milwaukee, Minneapolis, and Detroit.

Innovation was the major factor in Tony’s success in converting a small van shop into one of the largest and most profitable custom van operations in the Midwest. Tony seemed to have a special ability to design and develop unique features and devices that were always in high demand by van owners. An example was Shower-Rific, which was developed by Tony only 6 months after Custom Vans, Inc., was started. These small showers were completely self-contained, and they could be placed in almost any type of van and in a number of different locations within a van. Shower-Rific was made of fiberglass, and contained towel racks, built-in soap and shampoo holders, and a unique plastic door. Each Shower-Rific took 2 gallons of fiberglass and 3 hours of labor to manufacture.

Most of the Shower-Rifics were manufactured in Gary in the same warehouse where Custom Vans, Inc., was founded. The manufacturing plant in Gary could produce 300 Shower-Rifics in a month, but this capacity never seemed to be enough. Custom Van shops in all locations were complaining about not getting enough Shower-Rifics, and because Minneapolis was farther away from Gary than the other locations, Tony was always inclined to ship Shower-Rifics to the other locations before Minneapolis. This infuriated the manager of Custom Vans at Minneapolis, and after many heated discussions, Tony decided to start another manufacturing plant for Shower-Rifics at Fort Wayne, Indiana. The manufacturing plant at Fort Wayne could produce 150 Shower-Rifics per month.

The manufacturing plant at Fort Wayne was still not able to meet current demand for Shower-Rifics, and Tony knew that the demand for his unique camper shower would grow rapidly in the next year. After consulting with his lawyer and banker, Tony concluded that he should open two new manufacturing plants as soon as possible. Each plant would have the same capacity as the Fort Wayne manufacturing plant. An initial investigation into possible manufacturing locations was made, and Tony decided that the two new plants should be located in Detroit, Michigan; Rockford, Illinois; or Madison, Wisconsin. Tony knew that selecting the best location for the two new manufacturing plants would be difficult. Transportation costs and demands for the various locations would be important considerations.

The Chicago shop was managed by Bill Burch. This shop was one of the first established by Tony, and it continued to out-perform the other locations. The manufacturing plant at Gary was supplying 200 Shower-Rifics each month, although Bill knew that the demand for the showers in Chicago was 300 units. The transportation cost per unit from Gary was $10, and although the transportation cost from Fort Wayne was double that amount, Bill was always pleading with Tony to get an additional 50 units from the Fort Wayne manufacturer. The two additional manufacturing plants would certainly be able to supply Bill with the additional 100 showers he needed. The transportation costs would, of course, vary, depending on which two locations Tony picked. The transportation cost per shower would be $30 from Detroit, $5 from Rockford, and $10 from Madison.

Wilma Jackson, manager of the Custom Van shop in Milwaukee, was the most upset about not getting an adequate supply of showers. She had a demand for 100 units, and at the present time, she was only getting half of this demand from the Fort Wayne manufacturing plant. She could not understand why Tony didn’t ship her all 100 units from Gary. The transportation cost per unit from Gary was only $20, while the transportation cost from Fort Wayne was $30. Wilma was hoping that Tony would select Madison for one of the manufacturing locations. She would be able to get all the showers needed, and the transportation cost per unit would only be $5. If not in Madison, a new plant in Rockford would be able to supply her total needs, but the transportation cost per unit would be twice as much as it would be from Madison. Because the transportation cost per unit from Detroit would be $40, Wilma speculated that even if Detroit became one of the new plants, she would not be getting any units from Detroit.

Custom Vans, Inc., of Minneapolis was managed by Tom Poanski. He was getting 100 showers from the Gary plant. Demand was 150 units. Tom faced the highest transportation costs of all locations. The transportation cost from Gary was $40 per unit. It would cost $10 more if showers were sent from the Fort Wayne location. Tom was hoping that Detroit would not be one of the new plants, as the transportation cost would be $60 per unit. Rockford and Madison would have a cost of $30 and $25, respectively, to ship one shower to Minneapolis.

The Detroit shop’s position was similar to Milwaukee’s–only getting half of the demand each month. The 100 units that Detroit did receive came directly from the Fort Wayne plant. The transportation cost was only $15 per unit from Fort Wayne, while it was $25 from Gary. Rick Lopez, manager of Custom Vans, Inc., of Detroit, placed the probability of having one of the new plants in Detroit fairly high. The factory would be located across town, and the transportation cost would be only $5 per unit. He could get 150 showers from the new plant in Detroit and the other 50 showers from Fort Wayne. Even if Detroit was not selected, the other two locations were not intolerable. Rockford had a transportation cost per unit of $35, and Madison had a transportation cost of $40.

Tony pondered the dilemma of locating the two new plants for several weeks before deciding to call a meeting of all the managers of the van shops. The decision was complicated, but the objective was clear–to minimize total costs. The meeting was held in Gary, and everyone was present except Wilma.

Tony: Thank you for coming. As you know, I have decided to open two new plants at Rockford, Madison, or Detroit. The two locations, of course, will change our shipping practices, and I sincerely hope that they will supply you with the Shower-Rifics that you have been wanting. I know you could have sold more units, and I want you to know that I am sorry for this situation.

Rick: Tony, I have given this situation a lot of consideration, and I feel strongly that at least one of the new plants should be located in Detroit. As you know, I am now only getting half of the showers that I need. My brother, Leon, is very interested in running the plant, and I know he would do a good job.

Tom: Rick, I am sure that Leon could do a good job, and I know how difficult it has been since the recent layoffs by the auto industry. Nevertheless, we should be considering total costs and not personalities. I believe that the new plants should be located in Madison and Rockford. I am farther away from the other plants than any other shop, and these locations would significantly reduce transportation costs.

Rick: That may be true, but there are other factors. Detroit has one of the largest suppliers of fiberglass, and I have checked prices. A new plant in Detroit would be able to purchase fiberglass for $2 per gallon less than any of the other existing or proposed plants.

Tom: At Madison, we have an excellent labor force. This is due primarily to the large number of students attending the University of Wisconsin. These students are hard workers, and they will work for $1 less per hour than the other locations that we are considering.

Bill: Calm down, you two. It is obvious that we will not be able to satisfy everyone in locating the new plants. Therefore, I would like to suggest that we vote on the two best locations.

Tony: I don’t think that voting would be a good idea. Wilma was not able to attend, and we should be looking at all of these factors together in some type of logical fashion.

Discussion Question

Where would you locate the two new plants? Why?

Answer 1

The current supply network at Custom Vans, Inc. for Shower-Rific shower stalls is not meeting demand for its four assembly shops. Custom Vans, Inc plans on standing up two additional Shower-Rific production plants out of a combination of Detroit, Madison or Rockford to help met demand and optimize cost. The current configuration has a maximum output of 450 Shower-Rific shower assemblies and their current demand across the four shops is 750 units. Production is currently costing the company $9,000 in shipping.

Units / Cost. Chicago. Milwauke. Minneapolis. Detroit. Supply

Gary. 200 / 10 20 100 / 40 25 300

Ft Wayne. 20 50 / 30 50 100 / 15 150

Demand. 300 100 150 200 750 \ 450

Current Total Cost = 200(10) + 50(30) + 100(40) + 100(15) = $9,000

By evaluating each scenario with the two additional assembly plants we can determine that the addition of Detroit-Madison plants provide the optimal solution while meeting demand. Because Detroit can purchase fiberglass cheaper than the other plants a deduction of $4 was taken from its shipping cost to all locations. Also, Madison can hire at $1 less an hour because of their eager pool of college students so $1 was removed for all shipping costs from Madison.

Detroit-Madison = $10,200

Madison-Rockford = $10,550

Detroit-Rockford = $11,400

Detroit-Madison Solution

COSTS. Chicago. Milwaukee. Minneapolis. Detroit. Supply

Gary. 10 20 40 25 300

Ft Wayne. 20 30 50 15 150

Detroit. 26 36 56 1 150

Madison. 7 2 22 37 150

Demand. 300. 100 150 200 750 \ 750

Shipments

Shipments. Chicago. Milwaukee. Minneapolis. Detroit. Row Total

Gary 200. 0. 100. 0. 300

Ft Wayne. 100. 0. 0. 50. 150

Detroit. 0. 0. 0. 150. 150

Madison. 0. 100. 50. 0. 150

Column Total. 300. 100. 150. 200. 750/750

Total Cost = 200(10) + 100(20) + 100(2) + 100(40) + 50(22) + 50(15) + 150(1) = $10,200

Rockford-Madison Solution

COSTS. Chicago. Milwaukee. Minneapolis. Detroit. Supply

Gary 10. 20. 40. 25. 300

Ft Wayne. 20. 30. 50. 15. 150

Rockford. 5. 10. 30. 35. 150

Madison. 7. 2. 22. 37. 150  

Demand. 300. 100. 150. 200. 750/750

Shipments

Shipments. Chicago. Milwaukee. Minneapolis. Detroit. Row Total

Gary 250. 0. 0. 50. 300

Ft Wayne. 0. 0. 0. 150. 150

Rockford. 50. 100. 0. 0. 150

Madison. 0. 0. 150. 0. 150

Column Total. 300. 100. 150. 200. 750/750

Total Cost = 250(10) + 50(5) + 100(10) + 150(22) + 50(25) + 150(15) = $10,550

Detroit-Rockford Solution

COSTS. Chicago. Milwaukee. Minneapolis. Detroit supply

Gary 10 20. 40 25. 300

Ft Wayne. 20 30. 50. 15. 150

Rockford. 5. 10. 30. 35. 150

Detroit. 26. 36. 56. 1. 150

Demand. 300 100. 150. 200. 750/750

Shipments

Shipments chicago. Milwaukee. Minneapolis. Detroit. Row Total

Gary 200. 100. 0. 0. 300

Ft Wayne. 100. 0. 0. 50. 150

Rockford. 0. 0. 150. 0. 150

Detroit. 0. 0 0. 150. 150

Column Total. 300. 100. 150. 200. 750/750

Total Cost = 200(10) + 100(20) + 100(20) + 150(30) + 50(15) + 150(1) = $11,400