This case describes the problems facing Sue McCaskey, the new materials manager of a wholesale distributor of auto parts. She seeks ways to cut the bloated inventories while improving customer service. Backorders with excessive lost sales are all too frequent. Inventories were much higher than expected when the new facility was built, even though sales have not increased. Summary data on inventory statistics, such as inventory turns, are not available. McCaskey decides to begin with a sample of two products to uncover the nature of the problems—the EG151 exhaust gasket and the DB032 drive belt.
The purpose of this case is to allow the student to put together a plan, using either a continuous review system (Q system) or a periodic review system (P system), for two inventory items. Enough information is available to determine the EOQ and R for a continuous review system (or P and T for a periodic review system). Because stockouts are costly relative to inventory holding costs, a 95 percent cycle-service level is recommended. Inventory holding costs are 21 percent of the value of each item (expressed at cost). The ordering costs ($20 for exhaust gaskets and $10 for drive belts) should not be increased to include charges for making customer deliveries. These charges are independent of the inventory replenishment at the warehouse and are reflected in the pricing policy.
We now find appropriate policies for a Q system, beginning with the exhaust gasket. Shown here are the calculations of the EOQ and R, followed by a cost comparison between this continuous review system and the one now being used. The difference is what can be realized by a better inventory control system. Reducing lost sales due to backorders is surely the biggest benefit. 1. EG151 Exhaust Gasket a. New plan Begin by estimating annual demand and the variability in the demand during the lead time for this first item. Working with...