Professional Documents
Culture Documents
1
1
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 [dIs'trIbjutq] 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 2 weeks of this year is shown in the following table: managment for just two
WEEK
DEMAND
WEEK
DEMAND
104
12
97
103
13
99
107
14
102
105
15
99
102
16
103
102
17
101
101
18
101
104
19
104
100
20
108
10
100
21
97
11
103
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 backordered, and there is a
scheduled receipt (, , , ) of 150 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
11
18
17
50
12
33
18
53
13
53
19
54
14
54
20
49
15
51
21
52
16
53
Because this product is new, data are available only since its introduction in week 11.
Currently, 324 units are on hand; there are no backorders and no scheduled receipts.
A lot size of 1,000 units is being used, with the lead time fairly constant at three 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 percent 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 expenditures for utilities and maintenance
and debt service on the 100,000-square-foot warehouse, which was built for $1.5 million.