MGT 330 Sullivan College Managing Emporium Inventory Case Study Discussion Aanswer the questions related to the case study titled Parts Emporium. Should be

MGT 330 Sullivan College Managing Emporium Inventory Case Study Discussion Aanswer the questions related to the case study titled Parts Emporium. Should be atleast 2 pages. LE SEIN
Day
2
3
Beginning inventory position
4
1,700
5
6
7
831
8
9
10
1,500
Number ordered
391
1,500
3,000
3,232
2,315
Daily demand
3,000
1,200
869
902
1,900
1,109
947
968
831
917
1,069
-71
391
–556
Day-ending inventory
Ordering costs ($200 per order)
Holding costs ($0.05 per piece
2,032
2,315
200
1,246
200
200
41.55
200
per day)
0.00
19.55
0.00
101.60
115.75
62.30
Shortage costs ($2 per piece)
0
142
0
1,112
0
Total cost for day
0
0
241.55
142.00
219.55
1,312.00
101.60
115.75
262.30
Cumulative cost from last day
0.00
241.55
383.55
603.10
1,915.10
2,016.70
2,132.45
Cumulative costs to date
241.55
383.55
603.10
1,915.10
2,016.70
2,132.45
2,394.75
CASE
Parts Emporium
Parts Emporium, Inc. is a wholesale distributor of automobile parts formed
by two disenchanted auto mechanics, Dan Block and Ed Spriggs. Origi-
nally located in Block’s garage, the firm showed slow but steady growth for
7 years before 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. Fifteen years later, Parts Empo-
rium was the largest independent distributor of auto parts in the north central
region
Recently, Parts Emporium relocated to a sparkling new office and ware-
house 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
increased from 65 percent to more than 90 percent of capacity. During this
same period, however, sales growth stagnated. These conditions motivated
Block and Spriggs to hire the first manager from outside the company in the
firm’s history
It is June 6, Sue McCaskey’s first day in the newly created posi-
tion of materials manager for Parts Emporium. A recent graduate of a
2
370
PART 2
MANAGING CUSTOMER DEMAND
receipt of 150 units.
fairly constant at 2 weeks. Currently, at the end of week 21, no inventory is
on hand, 11 units are backordered, and the company is awaiting a scheduled
The DB032 drive belt is purchased from the Bendox Corporation of Grand
Rapids, Michigan. Actual demand so far this year is shown in the following table:
Week
Actual Demand
Week
Actual Demand
11
18
17
50
12
33
18
53
13
53
19
54
14
54
20
49
15
51
21
52
prominent business school, McCaskey is eagerly awaiting her first real-
world problem. At approximately 8:30 A.M., it arrives in the form of sta-
tus reports on inventory and orders shipped. At the top of an extensive
computer printout is a handwritten note from Joe Donnell, the purchas-
ing 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 are welcome to do so yourself.
Welcome aboard!”
A little upset that aggregate information is not 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 Empo-
rium decided to create the position she now fills. It seems that the inventory
is in all the wrong places. Although an average of approximately 60 days of
inventory is on hand, the firm’s customer service is inadequate. Parts Empo-
rium 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 at least 95 percent should be achieved.
McCaskey knows that although her influence to initiate changes will be lim-
ited, she must produce positive results immediately. Thus, she decides to concen-
trate 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 this year is shown in the
following table:
16
53
Because this product is new, data are available only since its introduc-
tion in week 11. Currently, 324 units are on hand, with no backorders and no
scheduled receipts. A lot size of 1,000 units is being used, with the lead time
fairly constant at 3 weeks.
The wholesale prices that Parts Emporium charges its 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 shrink-
age. 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 will not 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, the company can charge a delivery fee.
Although most customers pick up their parts at Parts Emporium, some orders
are delivered to customers. To provide this service, Parts Emporium contracts
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.
Week
Actual Demand
Week
Actual Demand
1
104
12
97
2
103
13
99
3
107
14
102
4.
105
15
99
5
102
16
103
6
102
17
101
7
101
18
101
8
104
19
104
9
100
20
108
10
100
21
97
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
11
103
exhaust gasket and the DB032 drive belt. Be sure to present a proper
inventory system and recognize all relevant costs.
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
2. By how much do your recommendations for these two items reduce
annual cycle inventory, stockout, and ordering costs?

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