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. This increased selection, combined with trend toward longer car ownership, led to an explosive growth of business. Fifteen years later, Parts Emporium was the largest independent distributor of auto parts in the north central region. Recently, Parts Emporium relocated to a sparking 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 increased from 65 percent to more than 90 percent of capacity. During this same period, however, sales growth stagnated. These conditions motivated Block and Spriggs to hire the first manager from outside the company in the firm's history. It is June 6, Sue Mc Caskey's first day in the newly created position of materials manager for Parts Emporium. A recent graduate of a prominent business school, McCaskey is eagerly awaiting her first-world problem. At approximately 8.30am, 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 position she now fills. 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 backorder he 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, McCaskey believes that a cycle-service level of at least 95 percent should be achieved. NMDN Week Actual Demand Week Actual Demand 104 12 97 2 103 13 99 3 107 14 102 14 105 15 99 102 16 103 6 102 17 101 101 18 101 8 104 19 104 9 100 20 108 110 100 21 97 111 103 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 products line: the EG151 exhaust gasket and the DB032 drive belt. If she can demonstrate significant gains from proper inventory management for just two 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 overseas supplier, Haipei, Inc. Actual demand for the first 21 weeks of this year is shown in the following table: A quick review of past orders, shown in another document, indicates that a lot size of 150 units being used and that the lead-time from Haipei is fairly constant at 2 weeks. Currently, at the end of week 21, no inventory is on hand, 11 units are backordered, and the company is awaiting 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 111 18 17 50 12 33 18 53 13 53 19 54 114 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, with no backorders and no scheduled receipts. A lot size of 1000 units is heinglised with the lead time fairly constant at 3 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 percentage 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, McCaskey reasons that these warehousing costs can be ignored because they will not change for the range of inventory policies that she is considering. Out of pocket costs for parts Emporium to place an order with suppliers are estimated to be $20 per order for exhaust gaskets and $10 per order for drive belts. On the outbound side, the company can change a delivery fee. Although most customers pick up their parts at Parts Emporium, some orders are delivered to customers. To provide this service, Parts Emporium contracts with local company for a flat fee $21.40 per order, which is added to the customer's bill. McCaskey is unsure whether to increase the ordering costs for Parts Emporium to include delivery charges. As a team, analyze the "Parts Emporium" case (p.369-370)., by answering the following questions: What is the total annual cycle-inventory cost (i.e., holding cost + ordering cost) of the two parts, respectively, based on their current ordering quantity? What is the economic order quantity (EOQ) for the two parts? What would be the total cost (i.e., holding cost + ordering cost) of the two parts, respectively, if they were to switch to EOQ? How are they different from the current costs? What are the reorder points (R) for the two parts, respectively, if Sue were to adopt a continuous- review system (Q-system)? What are the time between orders (P) and the target inventory (T) for the two parts, if Sue were to adopt a period-review system (P-system)? Which ordering system (Q or P) would you recommend for each of the two parts? Why