It is June 6, Sheila Grainger first day in the newly created position of materials manager for Parts Warehouse. A recent graduate of a prominent business school, Grainger 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 Mike Smithson, 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, Grainger 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 Auto Supply Warehouse 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. Auto Supply Warehouse tries to backorder the customer orders not immediately filled from stock, but some 10 percent of demand is being lost to competing distributorships. Because stock outs are costly relative to inventory holding costs, Grainger believes that a cycle-service level of at least 95 percent should be achieved. 

Auto Supply Warehouse., was formed in 1976 as a wholesale distributor of automobile parts by two disenchanted auto mechanics, David Brunswick and Ernie Simpson. Originally located in Brunswick’s garage, the firm showed slow but steady growth until 1979, when 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. By 1998, Auto Supply Warehouse was the largest independent distributor of auto parts in the North Central region. In 2000, Auto Parts Warehouse 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 Brunswick and Simpson to hire the first manager from outside the company in the firm’s history. Sheila Grainger 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 EG252 exhaust gasket and the DB539 drive belt. If she can demonstrate significant gains from proper inventory management for just two products, perhaps Brunswick and Simpson will give her the backing needed to change the total inventory management system. The EG252 exhaust gasket is purchased from an overseas supplier, Hansong, Inc. Actual demand for the first 21 weeks of 2001 is shown in the following table:

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

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 Hansong 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 DB539 drive belt is purchased from the Bronson Corporation of Grand Rapids, Michigan. Actual demand so far in 2001 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 Auto Supply Warehouse charges its customers are $13.99 for the EG252 exhaust gasket and $9.59 for the DB539 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. Auto Supply Warehouse 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. However, Grainger reasons that these warehousing costs can be ignored because they will not change formost customers pick up their parts at Auto Supply Warehouse, some orders are delivered to customers. To provide this service, Parts Warehouse contracts with a local company for a flat fee of $21.40 per order, which is added to the customer’s bill. Grainger is unsure whether to increase the ordering costs for Parts Warehouse to include delivery charges. This is an operations management case study which requires a SWOT analysis and quantitative analysis comprising of break even analysis, Volume cost analysis amongst other things. Mention the assumptions n recommendations and inventory related calculations.