Case Parts Emporium Inc. Is A Wholesale Distributor

Case Parts Emporiumparts Emporium Inc Is A Wholesale Distributor O

Parts Emporium, Inc., is a wholesale distributor of automobile parts founded by two auto mechanics, Dan Block and Ed Spriggs. The company experienced slow growth in its early years, initially operating out of a garage before relocating to an old meat-packing warehouse in Chicago's South Side, expanding its inventory and customer base over time. After 15 years, it became the largest independent auto parts distributor in the north central region. Recently, the company moved to a new, large warehouse near Chicago, with over 100,000 square feet of space, and increased warehouse utilization from 65% to over 90%, but sales growth has stagnated. To address operational challenges, the owners hired a new materials manager, Sue McCaskey, who is beginning her role amidst inventory management issues. The company’s inventory levels are high, with an average of 60 days of stock, but customer service is inadequate, with a 10% demand loss due to stock-outs. McCaskey aims to improve inventory management for two key products—the EG151 exhaust gasket and the DB032 drive belt—as a pilot to justify broader systemic improvements.

The EG151 exhaust gasket is sourced from Haipei, Inc., with demand data from the first 21 weeks of the year showing irregular inventory and backordering issues. It is ordered in lots of 150 units, with a lead time of two weeks, and currently, there are no units on hand but pending deliveries of 150 units and some backorders. The drive belt, supplied by Bendox Corporation, is a newer product with demand data starting from week 11, a current inventory of 324 units, and a lead time of three weeks. The product is ordered in lots of 1,000 units. The selling price for the exhaust gasket is $12.99, with a gross margin of approximately 32%, and for the drive belt, $8.89 with a gross margin of about 48%. Inventory holding costs are estimated at 21% of inventory value annually, including opportunity costs, taxes, and insurance, while order placement costs are $20 for the gasket and $10 for the drive belt. Delivery charges are also factored into customer billing, with a flat fee of $21.40 per delivery order, and McCaskey considers whether to incorporate delivery costs into order calculations.

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In analyzing the inventory management challenges faced by Parts Emporium, it is essential to understand the fundamental principles of inventory control, particularly when applying them to specific products such as the EG151 exhaust gasket and the DB032 drive belt. Effective inventory management balances the costs associated with ordering and holding inventory against the costs of stockouts, aiming to meet customer service objectives efficiently.

One of the key metrics considered here is the cycle-service level, which McCaskey aims to improve to at least 95%. This metric reflects the probability of not facing a stockout during the replenishment cycle and directly affects customer satisfaction and sales revenue. To achieve this target, the company must optimize order quantities and reorder points using inventory models like the Economic Order Quantity (EOQ) and the Reorder Point (ROP) framework.

For the EG151 exhaust gasket, with demand data provided over 21 weeks, McCaskey needs to forecast future demand to determine an appropriate reorder point. Given the lead time of two weeks and historical demand variability, calculating the EOQ involves the order cost, holding cost percentage, and weekly demand estimates, which then inform the safety stock level needed to maintain the desired service level. Safety stock serves as a buffer against demand uncertainties and lead time variability, enhancing the cycle-service level.

Similarly, for the DB032 drive belt, which is a new product with demand data starting from week 11, demand forecasting is more challenging but can be derived using moving averages or exponential smoothing methods. Given the large lot size of 1,000 units and a three-week lead time, McCaskey must consider whether the current stock levels are sufficient to meet expected demand or whether adjusting order policies is necessary.

The cost components associated with each product influence the optimal order quantity. For example, the unit purchase price of the gasket ($12.99) and the drive belt ($8.89), combined with gross margins and holding costs, determine the total cost structure. Incorporating ordering costs ($20 for gaskets and $10 for drive belts) allows calculation of EOQ, which minimizes combined ordering and holding costs. The EOQ formula is:

EOQ = sqrt((2  Demand  Order Cost) / Holding Cost per Unit)

where demand is the estimated weekly demand multiplied by the number of weeks in the replenishment cycle, and the holding cost per unit is the product of the inventory value and the annual holding percentage divided by the number of weeks in the year.

Safety stock calculations incorporate the demand variability and lead time variability, often using standard deviation estimates of demand during the lead time. Higher safety stock levels improve service levels but increase holding costs, requiring careful balancing. McCaskey must analyze demand variability for these products to determine appropriate safety stock levels that support the 95% cycle-service level goal.

Additionally, considering delivery costs, the company’s decision to include a flat delivery fee in the customer's bill or to absorb these costs impacts the overall inventory policy. Integrating delivery costs into order size calculations ensures more accurate cost assessments and can influence order quantities and frequency.

Beyond the immediate product-level analysis, McCaskey should consider adopting inventory management systems that utilize real-time data collection and inventory analytics to enhance decision-making. Automated systems enable continuous monitoring of stock levels and demand patterns, facilitating timely reordering and reducing stockouts.

Implementing just-in-time (JIT) principles can also reduce excess inventory, but this approach requires reliable suppliers and stable demand—a challenging combination given the demand variability observed. Alternatively, safety stock and reorder point adjustments remain practical methods to ensure high service levels without overstocking.

In conclusion, the strategic application of inventory control principles—particularly EOQ modeling, safety stock optimization, demand forecasting, and integrated logistical considerations—can significantly improve Parts Emporium’s customer service levels. For the two focus products, tailored inventory policies derived from demand data and cost analysis can demonstrate the benefits of effective inventory management, potentially leading to wider systemic changes across the organization. McCaskey's challenge lies in translating these analytical insights into actionable policies that balance service performance with inventory costs.

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