Reference no: EM13884826

Parts Emporium

It is June 6, Sue McCaskey?s first day in the newly created position of materials

manager for Parts Emporium. A recent graduate of a prominent business school,

McCaskey is eagerly awaiting her first real-world problem. At approximately 8:30 A.M. it arrives in the form of status reports on inventory and orders shipped. At the top of an extensive computer printout is a handwritten note from Joe Donnell, the purchasing manager:

Attached you will find the inventory and customer service performance data. Rest

assured that the individual inventory levels are accurate because we took a complete physical inventory count at the end of last week. Unfortunately, we do not keep compiled records in some of the areas as you requested. However, you?re welcome to do so yourself. Welcome aboard!

A little upset that aggregate information isn?t available, McCaskey decides to randomly select a small sample of approximately 100 items and compile inventory and customer service characteristics to get a feel for the "total picture." The results of this experiment reveal to her why Parts Emporium decided to create the position she now fills. It seems that the inventory is in all the wrong places. Although there is an average of approximately 60 days of inventory, customer service is inadequate. Parts Emporium tries to backorder the customer orders not immediately filled from stock, but some 10 percent of demand is being lost to competing distributorships. Because stockouts are costly relative to inventory holding costs, McCaskey believes that a cycle-service level of a least 95 percent should be achieved.

Parts Emporium, Inc. was formed in 1967 as a wholesale distributor of

automobile parts by two disenchanted auto mechanics, Dan Block and Ed Spriggs. Originally located in Block?s garage, the firm showed slow but steady growth until 1970, when it relocated to an old, abandoned meat-packing warehouse on Chicago?s South Side. With increased space for inventory storage, the company was able to begin offering an expanded line of auto parts. This increased selection, combined with the trend toward longer car ownership, led to an explosive growth of the business in the mid to late 1970s.

By 1991, Parts Emporium was the largest independent distributor of auto parts in the North Central region.

In 1993, Parts Emporium relocated in a sparkling new office and warehouse

complex off Interstate 55 in suburban Chicago. The warehouse space alone occupied more than 100,000 square feet. Although only a handful of new products have been added since the warehouse was constructed, its utilization has increased from 65 percent to more than 90 percent of capacity. During this same period, however, sales growth has

stagnated. These conditions motivated Block and Spriggs to hire the first manager from outside the company in the firm?s history.

Sue McCaskey knows that although her influence to initiate changes will be limited, she must produce positive results immediately. Thus she decides to concentrate on two products from the extensive product line: the EG151 exhaust gasket and the DB032 drive belt. If she can demonstrate significant gains from proper inventory management for just two products, perhaps Block and Spriggs

will give her the backing needed to change the total inventory management system.

The EG151 exhaust gasket is purchased from an overseas supplier, Haipei, Inc.

Actual demand for the first 21 weeks of 1994 is shown in the table below.

 

Week Demand Week Demand

1              104        11        103

2               103       12         97

3               107         13        99

4                105        14      102

5                 102       15       99

6                 102        16      103

7              101          17      101

8             104         18         101

9             100        19         104

10           100         20         108

                               21           97

A quick review of past orders, shown in another document, indicates that a lot

size of 150 units is being used and that the lead time from Haipei is fairly constant at 2 weeks. Currently, at the end of week 21, no inventory is on hand; 11 units are backordered, and there is a scheduled receipt of 150 units.

The DB032 drive belt is purchased from the Bendox Corporation of Grand

Rapids, Michigan. Actual demand so far in 1994 is listed below.

Week Actual Demand

11               18

12               33

13               53

14              54

15               51

16             53

17               50

18               53

19              54

20              49

21              52

 

Because this product is new, data are av

ailable only since its introduction in week 11. Currently, 324 units are on hand; there are no backorders and no scheduled receipts.

A lot size of 1000units is being used, with the lead time fairly constant at 3 weeks.

The wholesale prices that Parts Emporium charges it customers are $12.99 for the EG151 exhaust gasket and $8.89 for the DB032 drive belt. Because no quantity discounts are offered on these two highly profitable items, gross margins based on current purchasing practices are 32 percent of the

wholesale price for the exhaust gasket and 48 percent of the wholesale price for the drive belt.

Parts Emporium estimates its cost to hold inventory at 21 percent of its inventory

investment. This percentage recognizes the opportunity cost of tying money

up in inventory and the variable costs of taxes, insurance, and shrinkage. The annual report notes other warehousing expenditures for utilities and maintenance and debt service on the 100,000 square foot warehouse, which was built for $1.5 million. However, McCaskey reasons that these warehousing costs can be ignored because they won?t change for the range of inventory policies that she is considering.

Out-of-pocket costs for Parts Emporium to place an order with suppliers are

estimated to be $20 per order for exhaust gaskets and $10 per order for drive belts. On the outbound side, there can be delivery charges. Although most customers pick up their parts at Parts Emporium, some orders are delivered to customers. To provide this service, Parts Emporium con

tracts with a local company for a flat fee of $21.40 per order, which

is added to the customer?s bill. McCaskey is unsure whether to increase the ordering costs for Parts Emporium to include delivery charges.

Questions:

1.Put yourself in Sue McCaskey?s position and prepare a detailed report to Dan

Block and Ed Spriggs on managing the inventory of the EG151 exhaust gasket

and the DB032 drive belt. Be sure to present a proper inventory system and

recognize all relevant costs.

2.By how much do your recommendations for these two items reduce annual cycle inventory, stockout, and ordering costs?

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