Operations Management Car Rental

Question :

The car rental market consists of two segments: the short-term segment, which rents for an average of 0.5 week, and the medium-term segment, which rents for an average of 2 weeks. Cheapest Car Rental currently rents an average of 200 cars a week to the short-term segment and 100 cars a week to the medium-term segment.

Answer :

There are two segments of car rental markets – short term and medium term. There are three stages at car rentals – Customer, cleaning and repair.

Number of cars rented by short term segment is 200 cars per week whereas number of cars rented by medium term segment is 100 cars per week.

Therefore, total number of inventory at customer stage = 100 + 200 = 300

Since on an average, there are 100 cars waiting to be cleaned, the total inventory at cleaning stage is 100.

The throughput refers to the rate at which the number of units goes through the process time. This rate is measured in terms of units/time. This can be calculated using the formula –

R = I/T where R = throughput, I = inventory and T = flow time

Short term segment rents 200 cars for an average of 0.5 weeks whereas medium term segment rents 100 cars for an average of 2 weeks. Therefore, throughput at Customer stage is calculated as 200 x 0.5 + 100 x 2 = 300 cars per week.

Since 20% of cars returned are found to be defective and need repairs, therefore throughput at the repairing stage = 300 cars/week x 20% = 60 cars/week.

Throughput at cleaning stage = 300 cars/week x 80% = 240 cars/week

Inventory refers to the number of units which are at present contained in a business process. These are measured in terms of units. it can be calculated by using the formula –

I = R x T

Flow time refers to the time which the units spend in the business process from the beginning. This is calculated using the formula –

T = I/ Throughput

Flow time for Customer stage = 300/300 = 1 week

Since car requiring repairs take 2 weeks to be repaired, the flow time at repairing stage is 2 weeks.

Now, Inventory at repairs stage = Throughput x Flowtime = 60 x 2 = 120 cars

Again, flowtime at cleaning stage = Inventory/ Throughput = 100/240 = 0.42

The throughput, inventory and flow time at each stage can be summarized as follows:-

Now revenue per week = 100 x $200 + 200 x $120 = $44000/week

Cleaning cost per week = 240 x $5 = $1200/week

Repair cost per week = 60 x $150 = $9000

Therefore, profit per week earned by Cheapest under current system = $44000 - $1200 - $9000 = $33800

Under first improvement i.e. decrease in time of repairs from 2 weeks to 1 week, the inventory in repair stage will decrease by 60 and will ultimately amount to 60 cars. This will result in reduction of number of cars required by 60 units. There will not be any change in other revenues and costs.

Under second improvement, i.e. decrease in cost per repair from $150 per car to $120 per car while keeping repair flow time at 2 weeks, the repair cost per week would be 60 x $120 = $7200. This would reduce the cost of repair and hence will result in the saving of $1800 per week. The profit will ultimately will increase by $1800.

Thus, second improvement is the most effective as this would result in the increase in the profit whereas first improvement will not have any effect on profit.

The aggregate flow performance is calculated on the basis of average inventory, average throughput as well as average flow time. The average of these 3 measures represents the whole unit.

• Average inventory represents the number of units which are of the requirement for meeting the demand raised by the customers.

• Average throughput represents the number of units flow through the process according to each unit of time. This indicates the rate at which the product is to be sold. An increment in throughput denotes the positive margin always.

• Average flow time indicates how much time is required so as to produce each unit.

The average of all these measures helps us to analyze the performance of the business. Moreover, the financial performance of the business can be targeted as well as there can be continual improvement in the business process for meeting the maximum net profit.