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 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 at least 95 percent should be achieved. Parts Emporium, Inc. was formed in 1973 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 1976, 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.
By 1998, Parts Emporium was the largest independent distributor of auto parts in the north central region. Recently, 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 m 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 over-seas supplier, Haipei, Inc. Actual demand for the first 21 weeks of this year is shown in the following table: WEEK
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 two weeks. Currently, at the end of week 21, no inventory is on hand; 11 units are...