Parts Emporium, Inc. is a wholesale distributor of automobile parts formed by two disenchanted auto mechanics, Dan Block and 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 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. Fifteen years later, Parts Emporium was the largest independent distributor of auto parts in the north central region.
Parts Emporium has engaged Sue McCaskey as materials manager for the company. She recently graduated from a prominent business school. As she is being handed the task of managing the firm’s inventory, she is upset that aggregate information is not available and she decides to randomly select a small sample of approximately 100 items and compile inventory and customer service characteristics to get a feel for “total picture”. From the result of this experiment, 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 Emporium tries to backorder the customer order not immediately filled from stock, but some 10 percent of demand is being lost to competing distributorship. Because stockouts are costly, relative to inventory holding costs, McCaskey believes that a cycle-service level of at least 95% should be achieved.
Sue McCaskey knows that her influence to initiate changes will be limited so she decides to concentrate on 2 products from extensive product line: the EG151 exhaust gasket and the DB032 drive belt.
EG151 Exhaust Gasket
EG151, exhaust gasket is purchased from an overseas supplier; Haipei, Inc. Actual demand for the first 21 weeks of this year is shown at Table 1.
Table 1: Actual Demand for EG151
|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 | |11 |103 | | |
The information for EG151 is shown at Table 2 below.
|Lot size |150 units | |Lead time |2 weeks | |Inventory on-hand |0 units | |Back order |11 units | |Scheduled receipt |150 units | |Wholesale Price |$12.99 | |Gross margins |32% of wholesale price | |Holding inventory cost |21% of inventory...