CRU Computer Rental free essay sample

CRU Computer Rentals is a national computer rental company that has seen rapid growth since its inception in 1990. The company purchases computers, printers, monitors, and other peripherals and rents them out both for the long term and short term. CRU’s sales have begun to increase from the previous quarter, but profitability continued to decline. Although revenue was increasing, the decline in profit warranted further investigation into the root problem causing this occurrence. CRU management needed to take corrective measures to reverse this trend and generate some alternatives that would lead to an increase in profitability. Most of CRU’s customers fit into one of three profiles, which differed mainly on the term of the lease. Large corporations replaced their computers every year to stay on the cutting edge of technology, thus leasing computers for a term of one year. Consulting firms and small businesses leased computers for two to four months at a time. We will write a custom essay sample on CRU Computer Rental or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Lastly, trade show participants rented very short term, typically for the duration of the show. Although CRU’s customers’ needs for the length of a rental differed, they all expected short lead times, usually one to two days, and quick, accurate delivery and installation of products. CRU’s inventory consisted of older model equipment and newer model equipment that they purchased, usually at the request of a client. Since technology in this industry changes rapidly, the demand and prices for older model equipment decline quickly. This leads CRU to sell their old equipment in the open market for their used machines and purchase newer models from the money generated. CRU fortunately has been able to recover book value on these older products in the past. CRU has two main warehouses, â€Å"Mega Centers†, located in Illinois and California and 23 local retail centers across the United States. All equipment at these locations are available to rent, with 90 percent of their inventory held at one of the main warehouses. When customers returned equipment, all of it was sent to a Mega Center to be repaired and/or reconfigured. The flow of orders and equipment through the CRU system was as follows (see appendix for flow chart). A customer initially makes a call to a CRU rental number to make an order. The call is routed to a sales specialist or to one of the Mega Centers. The sales specialist takes the order after verifies the customer’s credit information. Then he/she changes the status for the ordered equipment from Available for Rent (status 20) to Reserve Status (Status 32). After the order was entered into the system, it was routed to quality assurance and picking where the order would print out automatically. This printed order contained the details of the order and any special instructions. An employee would then review the order, locate the items ordered, and deliver the units to a holding area in configuration. Technicians then picked up the orders from this holding area to repair and/or reconfigure them. Once the technician was done, he/she would roll the order on a cart to the shipping department. An employee in the shipping department then reviewed the order, packaged it, and shipped it out. CRU covered the cost of shipping to customers, which averaged $25 per unit. Once the rental term was complete, the customer would ship the item back to one of the Mega Centers with prepaid postage paid for by CRU, which again had an average cost of $25 per unit. All items received back from customers at a Mega Center in the receiving department were classified as either defective (Status 40) or not defective (Status 24). Status 24 units were put into storage to be worked on by the pre-configuration department and status 40 units were put into storage to be worked on by the repairs group. Normally 30% of the items received would go to the repair group and 70% would go to the pre-configuration department. A technician in the pre-configuration department would pick the item from storage to be worked on and inspect it again to confirm that it did not need to be repaired; however, 15% of these units did indeed turn out to be defective and required repair. The technician would re-label these items as status 40 and put them back into storage. If the item only needed reconfiguration, the technician would work on the item and then put it back into storage as status 20, available for rent. The cost of converting an item from status 24 to status 20 was $4. Technicians in the repair group would check an item from storage and determine what needed to be replaced. They would fill out an order sheet for parts needed to repair the item and send it to the parts department. The item would then be classified as status 41 and sent to storage. Once the parts department received the items they ordered from suppliers, they would tape the parts to the machine in need of repair, reclassify the item as status 42, and put it into storage. A technician would then take the item from storage again, repair it, and label the item status 20, available for rent. The average parts cost of repairing a unit was $150, which didn’t include any labor costs. CRU’s key performance measure was â€Å"utilization†. Utilization was measured by CRU as follows: Utilization = Inventory on Rent Total Inventory owned by CRU Management always aimed to keep utilization above 50% and CRU achieved an utilization rate of 56% last year(see Appendix for Calculation). Although revenues and utilization had increased from the previous year and were considered to be at reasonable levels by management, CRU’s profit continued to decline. It was managements goal to find solutions to this phenomenon and to increase profits. CRU questioned whether utilization was a good measure of future financial performance or if there were other measures that may be more appropriate to predict future profitability. In order to perform value stream mapping, which enable CRU to focus on process improvement, that is time spent by each unit in the buffer is calculated . Flow rate of the unit in each buffer is calculated using Little’s law. Little’s law can be stated as I=RT Average Flow rate is calculated as shown in Table 2 (Refer Appendix) The average weekly profit of CRU last year is calculated. From the calculations it is seen that CRU got a weekly revenue of $240,000 and had incurred an expense of $113,130. So they had a net profit of $126,870. Depriciation cost of units per week is calculated as $92340 . So operating expense can be calculated as $34520. From the results it is observed that contribution margin is greater than operating expense. (Refer Appendix for Calculation) We have determined that CRU is a company capable of increasing profits, but is in need of reconstructing their pricing scheme. With total revenues increasing over the last quarter, but profits falling, we have determined that their costs have increased more than their revenues. Although their key performance measure of utilization is important, the best measure for the company to measure their success should be focusing on keeping variable costs down. First, we analyze CRU’s profit/loss when implementing their sales drive . It is given that 600 units out of 1400 were rented for 8 weeks and the remaining 800 units for 4 weeks. So the Revenue was calculated as $256,000. Variable Cost is found to be $158,382. Depreciation is found to be $108,705. Hence it is found that with a sales drive CRU will suffer a loss of $11,087(Refer Appendix for Table 3 and calculation) Now we analyze CRU’s profit or loss without implementing sales drive. Here the Revenue is calculated as $144,000. The variable cost is found to be $67,878. The weekly Depreciation is calculated as $55,346. Here they will achieve a gain of $20,872(Refer Appendix for Table 4 and calculation). Hence it is not advisable to implement sales drive. Two concrete plans that help CRU is to Capture market for a longer period and to cut the shipping cost. We can take a look at the same without sales drive, but instead of CRU paying for shipping expenses, they pass this cost along to the customer. By doing this CRU will get a profit of $58,913 which is 2. 5 times of their profit without conducting sales drive. (Refer Appendix for calculation). As shown above, instead of posting a loss of ($11,708) in the first case, they have a profit of $58,913 in the second case when they are able to eliminate their shipping expense. We recommend management to eliminate their shipping expenses to increase their profit. By decreasing their variable costs, their contribution margin will increase. This will allow CRU to be able to cover their depreciation and operating expenses more efficiently and increase their bottom line. We found that the best way for CRU to decrease their variable costs is to cut out shipping expenses. Instead of paying for this expense, they should pass it on to the customer. As per the options suggested by vice president of sales two calculations were performed. First was by keeping inventory units same. It is found that to meet the requirements, the company will have to buy 520 extra units and 240 extra units for option A and option B respectively and sell 100 units for option C(Appendix Table 5). When profit of three options were calculated, Option A had the highest profit . So Option A can be considered as the best choice (Refer Appendix for Table 6 and calculation). Second Option was to keep flow rate the same. To meet the requirements, the company will have to buy 3738 extra units and 1732 extra units for option A and option B respectively and sell 725 units for option (Appendix Table 7). When profit was calculated Option C had the highest profit. So it can be selected as the best choice(Refer Appendix for Table 8 and Calculation). Appendix Flow Chart illustrating CRU’S Operations Table 1 CRU Flow Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1000 1000 1000*. 7=700 1000*. 3+700*. 15=405 405 405 405 405 1000 Inventory 8000 500 1500 1000 500 405 905 500 1000 Flow Time 8000/1000=8 0. 5 2. 14 2. 46 1. 23 1 2. 23 1. 23 2 Utilization Achieved by CRU Last Year Utilization = (1000* 8) 14405= 8000 14405= 56 % Average Time Spent By a Unit in Each Buffer Last Year Table 2 Customer Receiving Status24 Status40 Order stored Order at supplies Status 41 Status 42 Status20 Flow Time 8 0. 5 2. 14 2. 46 1. 23 1 2. 23 1. 23 2 Average Weekly Profit Revenue = 8,000* 30 = $240,000 Expense(Variable cost Rate) = 50*1,000(Shipping) +595*4 (pre-configuration) +405*150 (Repair)= $113,130 Profit (Contribution Margin) = 240,000 – 113,130= $126,870 Depreciation = (14,405 *1,000) 36 months (156 weeks)= $92,340 / week Operating Expense = 126,870 – 92,340=$34,530 / week Launching Sales Drive Case 1: Demand increases to 1400 units per week and flow time is same (with sales drive) Table 3 Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1400 1400 980 567 567 567 567 567 1400 Inventory 8000 1400*.. 5=700 2097 1400 697 567 264 697 2800 Flow Time 8000/1400=5. 71 0. 5 2. 14 2. 46 1. 23 1 2. 23 1. 23 2 Given 600 units out of 1400 were rented for 8 weeks and rest 800 units for 4 weeks. So Revenue = 600*8*30 + 800* 4* 35 = $256,000 Variable Cost = 2*25*1400 + 4*980*. 85 + 150*567= $158,382 Depreciation = 16958*1000/156= $108,705 Profit = 256000-158382-108705= $-11,087 (LOSS) Case 2: Demand is 600 units per week and flow time is same (without sales drive) Table 4 Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 600 600 420 243 243 243 243 243 600 Inventory 600*8=4800 300 898 597 298 243 541 298 1200 Flow Time 8 0. 5 2. 14 2. 46 1. 23 1 2. 23 1. 23 2 Revenue = 600*8*30= $144,000 Variable Cost = 2*25*600 + 4*420*. 85+ 150*243 = $67,878 Depreciation= 8634*1000/156= $55,346 Profit = 144000-67878-55346= $20782 (GAIN) Above results shows that the sales drive was not very effective. Average Weekly Profit By cutting Shipping Cost Revenue = 600*8*30 + 800* 4* 35 $256,000 Variable Cost = 0 (shipping costs) + 4*980*. 85 + 150*567 = $88,382 Depreciation = 16958*1000/156= $108,705 Profit = 256000-88382-108705= $58,913 (GAIN) Duration of Rental vs. Various Market Segments In order to solve this problem we will first find computers rented per week. Computers rented per week: Option A: . 6*1500+. 3*1000+. 1*600= 900+300+60= 1260 Option B: . 4*1500+. 4*1000+. 2*600= 600+400+120= 1120 Option C: . 2*1500+. 5*1000+. 25*600= 300+500+150= 950 CASE 1 Inventory size is same Table5 OptionA Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1260 1260 882 510 510 510 510 510 1260 Inventory 8000 500 1500 1000 500 405 905 500 2520 Flow Time 8000/1260=6. 35 0. 4 1. 7 1. 96 0. 98 0. 79 1. 77 0. 98 2 OptionB Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1120 11200 784 454 454 454 454 454 1120 Inventory 8000 500 1500 1000 500 405 905 500 2520 Flow Time 8000/1120=6. 35 0. 45 1. 91 2. 2 1. 1 0. 89 2 1. 1 2 Option C Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 950 950 665 385 385 385 385 385 950 Inventory 8000 500 1500 1000 500 405 905 500 2520 Flow Time 8000/950=8. 42 .53 2. 26 2. 6 1. 3 1. 05 2. 35 1. 3 2 Total number of inventory units: Option A: 8000+500+1500+1000+905+500+2520=14925 Option B: 8000+500+1500+1000+905+500+2240=14645 Option C: 8000+500+1500+1000+905+500+1900=14305 To meet the requirements, the company will have to buy 520 extra units and 240 extra units for option A and option B respectively and sell 100 units for option C. Table Comparing Revenue, Variable cost, Depreciation, and Profit Table 6 Case 1 Revenue Variable cost Depreciation Profit Option A (900*40+300*30+60*25)*52wk =2418000 141998. 8 95673. 07692 2180328 Option B (600*40+400*30+120*25)*52 =2028000 126765. 6 93878. 20513 1807356 Option C (300*40+500*30+150*25)*52 =1599000 107511 91698. 71795 1399790 Therefore, Option A is the best for keeping inventory constant. CASE 2 Flow time is same Table 7 OptionA Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1260 1260 882 510 510 510 510 510 1260 Inventory 1260*8= 10080 630 1887 1260 627 510 1137 627 2520 Flow Time 8 .53 2. 14 2. 47 1. 23 1 2. 23 1. 23 2 Option B Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 1120 1120 784 454 454 454 454 454 1120 Inventory 1120*8=8960 560 1677 1120 557 453 1011 557 2240 Flow Time 8 0. 5 2. 14 2. 47 1. 23 1 2. 23 1. 23 2 Option C Buffer Customer Receiving Status24 Status40 Order Stored Order at Supplies Status41 Status 42 Status 20 Throughput 950 950 665 385 385 385 385 385 950 Inventory 950*8=7600 475 1423 950 473 385 857 473 1900 Flow Time 8 0. 5 2. 14 2. 47 1. 23 1 2. 23 1. 23 2 Total number of units: Option A: 10080+630+1887+1260+1137+627+2520= 18141 Option B: 8960+560+1677+1120+1011+557+2240= 16125 Option C: 7600+475+1423+950+857+473+1900= 13678 To meet the requirements, the company will have to buy 3738 extra units and 1732 extra units for option A and option B respectively and sell 725 units for option C. Table Comparing Revenue, Variable cost, Depreciation, and Profit Table 8 Case 1 Revenue Variable cost Depreciation. Profit Option A (900*40+300*30+60*25)*52 =2418000 141998. 8 116288. 4615 2159713 Option B (600*40+400*30+120*25)*52 =2028000 126765. 6 103365. 3846 1797869 Option C (300*40+500*30+150*25)*52 =1599000 107511 87679. 48718 1403810 Therefore, Option C is the best for keeping flow time constant.