Read and prepare for answering problems3, 4 and 5 from Chapter 12 (Stevenson, 2021, p. 546).

1. Put yourself in Sue McCaskey's position and produce a detailed report to Dan Block and Ed Spriggs on managing the inventory of the EG151 exhaust gasket and the DB032 drive belt. be sure to present a proper inventory system and recognize all relevant costs.
2. How do the recommendations for these two items reduce annual cycle inventory, stock out, and ordering costs?

CASE PARTS EMPORIUM . It is June 6, Sue Mccaskey's first day in the newly created Sue Mccaskey knows that although her influence to position of materials manager for Parts Emporium. A initiate changes will be limited, she must produce positive recent graduate of a prominent business school, McCaskey results immediately. Thus, she decides to concentrate on is eagerly awaiting her first real-world problem. At two products from the extensive product line: the EG151 approximately 8:30 A.M. it arrives in the form of status exhaust gasket and the DB032 drive belt. If she can reports on inventory and orders shipped. At the top of an demonstrate significant gains from proper inventory man- extensive computer printout is a handwritten note from agement for just two products, perhaps Block and Spriggs Joe Donnell, the purchasing manager: "Attached you will will give her the backing needed to change the total inven- find the inventory and customer service performance data. tory management system. Rest assured that the individual inventory levels are accu- The EG151 exhaust gasket is purchased from an over- rate because we took a complete physical inventory cou cas supplier, Haipei, Inc. Actual demand for the first 21 at the end of last week. Unfortunately, we don't keep com- weeks of 2001 is shown in the following table piled records in some of the areas as you requested. However, you're welcome to do so yourself. Welcome aboard!" WEEK ACTUAL DEMAND WEEK ACTUAL DEMAND A little upset that aggregate information is not avail- able, Mccaskey decides to randomly select a small sample 104 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 828582889 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 100 filled from stock, but some 10 percent of demand is being 100 ost to competing distributorships. Because stockouts are costly relative to inventory holding costs, Mccaskey believes that a cycle-service level of at least 95 percent A quick review of past orders, shown in another docu- should be achieved. ment, indicates that a lot size of 150 units is being used Emporium, Inc., was formed in 1973 as a whole- and that the lead time from Haipei is fairly constant at two sale distributor of automobile parts by two disenchanted weeks. Currently, at the end of week 21, no inventory is on auto mechanics, Dan Block and Ed Spriggs. Originally and there is a scheduled located in Block's garage, the firm showed slow but steady receipt of 150 units. growth until 1976, when it relocated to an old, abandoned The DB032 drive belt is purchased from the Bendox meat-packing warehouse on Chicago outh Side. With Corporation of Grand Rapids, Michigan. Actual demand increased space for inventory storage, the company was so far in 2001 is shown in the following table: 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 ACTUAL DEMAND WEEK ACTUAL DEMAND business. By 1998, Parts Emporium was the largest inde pendent distributor of auto parts in the North Central 50 region. In 2000, Parts Emporium relocated in a sparkling new 54 office and warehouse complex off Interstate 55 in subur 52 ban 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 con- structed, its utilization has increased from 65 percent to Because this product is new, data are available only since more than 90 percent of capacity. During this same period, its introduction in week 11. Currently, 324 units are on however, sales growth has stagnated. These conditions hand; there are no backorders and no scheduled receipts. ed Block and Spriggs to hire the first manager from A lot size of 1,000 units is being used, with the lead time outside the company in the firm's history. fairly constant at three weeks. Krajewski, L. J,, Ritzman, L. P. and Malhotra, M.K (2007 ) P. 504 " Operations Management-Processes and Value chain " Eighth sedition . Pearson Prentice Hallcontinued The wholesale prices that Parts Emporium charges its customers are $12.99 for the EG151 exhaust gasket and $8.89 for the D3032 drive belt. Because no quantity dis- counts are offered on these two highly protable 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 2.1 percent of its inventory investment. This percent recog- nizes 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-sqnate-foot warehouse, which was built for $1.5 million. However, MeCaskey reasons that these warehous- ing 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. 0n the outbound side, there can be delivery charges. 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 mister-net's bill. McCasltey is unsure whether to increase the ordering costs for Parts Emporium to include delivery charges. Source Thls use was provided by Professor Robert Freeman. University ofHoustun