Southwest Airlines was one of the early “low cost” airlines
in the industry. Over the years,
Southwest has attempted to hold fares down by controlling their costs. To do this, they have done a number of things
such as purchasing fuel on the futures market to lock in prices when they
thought prices would rise. They also fly
just one model plane – Boeing 737 which reduces their maintenance costs because
they can standardize on parts and mechanic training. Related to spare parts, the company strives
to keep their inventory costs as low as possible. For example, consider tires for their
airplanes which according to historical data the company needs 40,000 a
year. Because of the tire quality
requirements, these tires are expensive costing SW in the range of $2,250
each. Southwest uses a 30 percent
carrying cost factor for parts inventory.
When SW places an order, they go out to the tire producers with a
“reverse auction” where they specify the tire characteristics, number of tires
desired, and delivery timing requirements.
Tire companies then submit bids to try to win the business. SW supply chain managers like this process
for getting tires but it is expensive costing the company about $80,000 each
time it goes through this process to place an order.
Assuming that the lowest bid for tires will be $2,250, what
is the number of tires that Southwest should order each time it places an
Referring to your answer in part a., how many orders per year
will the company need to make per year if the demand for tires remains at
Referring to parts a. and b., what is the total inventory
cost (excluding purchase cost) for the inventory plan you have calculated?
Assuming that demand for tires is steady throughout the 365
day year, and if lead time on getting tires is 11 days, at what inventory level
should SW place an order?
Suppose Southwest could find a quality tire supplier who
would deliver tires at $2,300 each in a Just-in-Time manner so that they
deliver the exact number of tires needed each day so that SW would not need to
carry any inventory. If this could
happen, SW believes it’s cost of receiving the tires each day would be $1,000. Would this be an option SW should
consider? Discuss both the financial and
non-financial aspects of this.