Case Study 2: Parts Emporium

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Case Study 2: Parts Emporium

Parts Emporium, Inc., is a wholesale distributor of automobile parts formed by two
disenchanted auto mechanics, Dan Block ase Study 2: Parts Emporium
Parts Emporium, Inc., is a wholesale distributor oand Ed Spriggs. Originally located in Block’s garage, the
firm showed slow but steady growth for 7 years before it relocated to an old, abandoned meatpacking
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 Emporium was the largest independent distributor of auto
parts in the north central region.
Recently, Parts Emporium relocated to 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 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 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 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 Emporium decided to create the position she now fills. It seems that the inventory is
in all the wrong places. Although an average of approximately 45 days of inventory is on hand,
the firm’s customer service is inadequate. Parts Emporium tries to backorder the customer
orders not immediately filled from stock, but some 15 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 98.5 percent should be achieved.
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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 this year is shown in the following table:
Week Actual Demand Week Actual Demand Week Actual Demand
1 112 8 112 15 107
2 111 9 108 16 111
3 116 10 108 17 109
4 113 11 111 18 109
5 110 12 105 19 112
6 110 13 107 20 117
7 109 14 110 21 103
A quick review of past orders, shown in another document, indicates that a lot size of 200 units
is being used and that the lead time from Haipei is fairly constant at 3 weeks. Currently, at the
end of week 21, no inventory is on hand, 11 units are backordered, and the company is awaiting
a scheduled receipt of 200 units.
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 Week Actual Demand
11 16 15 45 19 48
12 29 16 47 20 43
13 47 17 44 21 45
14 48 18 47
Because this product is new, data are available only since its introduction in week 11. Currently,
324 units are on hand, with no backorders and no scheduled receipts. A lot size of 500 units is
being used, with the lead time fairly constant at 2 weeks.
The wholesale prices that Parts Emporium charges its customers are $12.90 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 38
percent of the wholesale price for the exhaust gasket and 42 percent of the wholesale price for
the drive belt.
Parts Emporium estimates its cost to hold inventory at 25 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
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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.
Questions:
1. Provide brief answers (including the necessary explanations) to the following questions:
i. What are the major problems faced by Parts Emporium?
ii. McCaskey decided 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.” Can you suggest a better strategy?
iii. Why limiting the study to two items only?
iv. Why should we exclude the first two weeks of the DB032 from our analysis?
v. Should McCaskey increase the ordering costs for Parts Emporium to include
delivery charges?
vi. What is the current inventory system?
vii. What is the current level of service?
viii. What is the proposed inventory system? Why?
ix. How to convince the Executives of the company to adopt your
recommendations?
x. What will be the next step for McCaskey if Block and Spriggs give her the
backing needed to change the total inventory management system?
2. Put yourself in Sue McCaskey’s position and prepare a report to Dan Block and Ed
Spriggs on managing the inventory of Parts Emporium. The questions above are
intended to guide you in your report. The report is supposed to be composed of three to
five titled sections (a possible outline consists of an introduction, an analysis for EG151
Exhaust Gasket, an analysis for DB032 Drive Belt, and a conclusion) in addition to an
appendix where you show your calculations. Remember that the managers may not be
familiar with the theoretical concepts of inventory management. Therefore, you should try to make your report non‐technical and show all the technical stuff in the appendix.