Parts Emporium case study

Resource: Operations Management: Processes and Supply Chains, Ch. 9

Read CASE: Parts Emporium at the end of Ch. 9 (pp. 794).

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. This should be a type of inventory system that a company would implement and then identify related costs. Also, provide an actual software system that could be purchased to manage an inventory system along with the costs. Explain the benefits that would be relevant to the case scenario.

Discuss how your recommendations for these two items will reduce the annual cycle inventory, stock-out, and order costs. Be sure to include specific costs as a result.

Include strategic and tactical changes that might improve the company\’s inventory performance, reduce variability, and improve customer service. There should be at least two strategic and two tactical changes presented and identified as either strategic or tactical.

Answer

Parts Emporium

Parts Emporium is a wholesale dealer of auto components that has grown rapidly during the last 15 years. Despite having a new warehouse with 90% capacity utilization, sales growth has stalled. The company has experienced a plateau in sales growth over the same period. On average, they are holding 60 days’ worth of inventory. The inability to effectively manage their inventory has negatively affected profitability and revenue. Customers sometimes turn to competitors as Parts Emporium cannot always meet demand due to insufficient supply. The company tries to fulfill customer orders with backorders, but still falls short by 10%. Dan and Ed, the owners of Parts Emporium, are dissatisfied with their current business performance and have hired Sue McCaskey as the new Materials Manager to improve their operations. During an examination, McCaskey learns that inventory is in all the incorrect locations, resulting in unsatisfactory customer service, and that 10% of demand is gone to rival distributorships (Krajewski et al., 2010). Sue’s immediate task is to implement an efficient inventory system to enhance the company’s performance by increasing inventory accuracy and improving customer service. The company frequently experiences lost sales due to backorders, which Sue wants to eliminate. Since she lacks complete inventory records, she decides to start by implementing a proper inventory system for the EG151 exhaust gasket and the DB032 drive belt, two of their most popular products. Sue aims to decrease yearly cycle inventory, stock-out, and order costs and attain a 95% cycle-service level. If she achieves her objectives for these two products, she believes she can convince management to apply these changes to the entire inventory system.

A proper Inventory System and Relevant Costs

EOQ used to conduct this analysis. The analysis is based on demand estimates from weeks 13 to 21, excluding weeks 11 and 12 due to the new product’s start-up. The EOQ is calculated using a weekly demand average of 52 belts/week, resulting in an annual demand of 2704 belts, a holding cost of $0.97 per belt per annum, and an ordering cost of $10 per order. The calculated EOQ is 236 gaskets. The safety stock with the projected plan is higher than the current policy, but the added cost for safety stock is only $4.85. The cost comparison between the current and projected plans shows a 55% reduction in total costs. However, the projected plan may incur a cost due to lost backorder sales, which can be reduced by implementing a 95% cycle service level.

The current plan incurs substantial lost sales due to backorders, which can be reduced with the projected plan. For instance, in week 21, there are 11 units on backorder, which would cost at least $4.16 per seal ($2,206 per annum if 100% of annual sales were lost). The cycle inventory is Lot/2, with an average cycle inventory of 75 and 500 per the previous and new purchase system. The ordering cost for the previous and new purchase system is $720 and $320, respectively, saving $310 in early ordering cost.

Recommendations

The company should employ an endless review system with Q = 339 and R = 211 for the seal.  This would lead to an annual reduction of approximately 26% in the total ordering and holding costs, from $846 to $627. To prevent backorders and potential lost sales, she recommends maintaining a safety stock of 7, which is worth $12.95 ($1.85 x 7). The cost of a lost sale is estimated at $4.16 per gasket ($12.99 – 32%), and the new plan is expected to reduce the potential 10% in lost sales, valued at $2,206 per year.

For the DB032 drive belt, the firm should execute a continuous review system with a lot size quantity of 236 and a reorder point of 161. This would result in an annual reduction of 55% in the total ordering and holding costs, from $512 to $229. To prevent backorders and potential lost sales, it is recommended maintaining a safety stock of 5 worth $6.35 ($1.27 x 5). The lost sale cost is estimated at $4.27 per belt ($8.89 – 48%), and the new plan is expected to reduce the potential 10% in lost sales, valued at $1,155 per year.

Rationale of the Recommendations

The suggested continuous review systems will dramatically lower yearly cycle inventory, stock-out, and order costs for the DB032 drive belt and EG151 exhaust gasket. They will also have optimum lot sizes and reorder points. The ideal lot size and reorder point for the EG151 gasket will result in a 26% decrease the annual cycle inventory cost from $846 to $627. The 7-unit safety stock will lessen the need for backorders, and the estimated 10% lost revenue, or $2,206 annually. The outcome will translate into significant savings for the business and improve its inventory management practices.

Similarly, for DB032 drive belt, employing the continuous review system with the optimal lot size and reorder point will reduce the total ordering and holding costs by 55% annually from $512 to $229. The safety stock of 5 units will also mitigate the need for backorders, reducing the estimated 10% lost sales, which amounts to $1,155 annually. This will result in substantial savings for the company. Furthermore, the new plan will reduce order costs as the number of orders will decrease due to the optimal lot size and reorder point. For EG151 gasket, the number of orders will decrease from 36 to 16 per year, resulting in an order cost savings of $310. For DB032 drive belt, the number of orders will decrease from 35.36 to 11.47 per year, resulting in an order cost savings of $200.

Strategic and Tactical Changes

The firm can implement several strategic changes to enhance its operations. The company should work closely with suppliers. The business and its suppliers could work together to reduce lead times and supply variability. The approach can help the establishment to manage inventory levels more effectively and lower the risk of stock-outs and overstocking by collaborating closely with its suppliers allowing for exchange of inventory details in real-time (Loder, 2021). Building supplier relationships will take time and money, which will be needed for this strategic change. The business should also implement a vendor-managed inventory (VMI) system. A VMI system enables the company’s suppliers to control inventory levels on the company’s behalf. Guaranteeing that products are always in stock would allow the business to lower its inventory carrying costs while enhancing customer service. Additionally, this would be a strategic adjustment that needed careful supplier planning and a sizable technological investment.

The company can also implement several tactical changes to enhance its operations. The company could put in place a real-time inventory management system. It will track the real-time inventory levels and demand (Song et al., 2020). The move would enable the corporation to make more rational decisions about when and how much to order, lowering the risk of stock-outs and overstocking.  Moreover, employees could be cross-trained about activities in various operations and supply chain departments, including inventory management. The tactic would allow the organization to efficiently control inventory levels during busy periods while lowering the possibility of errors or miscommunications. Customers will also be served faster because human resource in demanding sections will be easily beefed up to cater for the excess load.

Conclusion

Parts Emporium has identified the need to improve its inventory management system and has taken steps to address the issue by hiring a Materials Manager, Sue McCaskey. Sue’s analysis has shown that implementing a continuous review system with lot size quantities, reorder points, and safety stock can significantly reduce ordering and holding costs while mitigating stock-outs’ impact on customer service and lost sales. By improving inventory accuracy and customer service, the company can improve its profitability and revenue, which have been impacted by the inability to maintain proper inventory levels. Moving forward, implementing strategic and tactical changes, such as developing supplier relationships, investing in technology, and improving forecasting, can help Parts Emporium achieve greater efficiency, reduce variability, and continue to provide high-quality service to its customers.

References

Krajewski, L. J., Ritzman, L. P., & Malhotra, M. K. (2010). Operations management: Processes and supply chains (p. 120). New Jersey: Pearson.

Loder, J. (2021). The five core aspects to supplier collaboration. Retrieved on February 25 2023, from cips.org/supply-management/opinion/2021/november/the-five-core-aspects-to-supplier-collaboration/.

Song, J. S., van Houtum, G. J., & Van Mieghem, J. A. (2020). Capacity and inventory management: Review, trends, and projections. Manufacturing & Service Operations Management22(1), 36-46. https://doi.org/10.1287/msom.2019.0798.

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