Expert answer:Chapter 9 Parts Emporium Supply Chain and Proper I

  

Solved by verified expert:Read CASE: Parts Emporium at the end of Ch. 9 (pp. 357). SEE ATTACHED AND READ CAREFULLY!!!!Put yourself in Sue McCaskey’s position and prepare a detailed report to Dan Block and Ed Spriggs on managing the inventory of the EG151 exhaust gasket and the DB032 drive belt.Write a 1,050- to 1,400-word report.Discuss Parts Emporium supply chain and possible remedies for its supply chain problems.Present a proper inventory system and recognize all relevant costs.Discuss how your recommendations for these two items will reduce the annual cycle inventory, stock-out, and order costs.Include strategic and tactical changes that might improve the company’s inventory performance, reduce variability, and improve customer service.Format your paper consistent with APA guidelines.
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CASE: Parts Emporium
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 the trend
toward longer car ownership, led to an explosive growth of the 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 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 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 McCaskey’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 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
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 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.
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
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:
Week
Actual Demand
Week
Actual Demand
1
104
2
103
3
107
4
105
5
102
6
102
7
101
8
104
9
100
10
100
11
103
12
97
13
99
14
102
15
99
16
103
17
101
18
101
19
104
20
108
21
97
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 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
11
18
12
33
13
53
14
54
15
51
16
53
Week
Actual Demand
17
50
18
53
19
54
20
49
21
52
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 1,000 units is being used, 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 charge 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 a local company
for a flat fee of $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.
CASE: Parts Emporium
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 the trend
toward longer car ownership, led to an explosive growth of the 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 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 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 McCaskey’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 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
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 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.
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
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:
Week
Actual Demand
Week
Actual Demand
1
104
2
103
3
107
4
105
5
102
6
102
7
101
8
104
9
100
10
100
11
103
12
97
13
99
14
102
15
99
16
103
17
101
18
101
19
104
20
108
21
97
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 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
11
18
12
33
13
53
14
54
15
51
16
53
Week
Actual Demand
17
50
18
53
19
54
20
49
21
52
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 1,000 units is being used, 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 charge 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 a local company
for a flat fee of $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.

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