OPM 502 Operations Management

Tuba ayrl Fall 2012/ 2013

Group Assignment #2 Case: Parts Emporium

Group #2:
Alev Demir Grkem Gentrk Holger Herbricht Mehmet Kemal Ucuzcu

Executive Summary
I. Status Quo: Although, the utilization of the warehouse increased from 65% to 90% of its capacity, the growth in sales stagnated. This shows that Parts Emporium has a major problem with its inventory management. For our analysis we took two products from the extensive product line: the EG151 exhaust gasket and the DB032 drive belt. The analysis of the EG151 revealed that it ran out of stock and that there are already 11 units backordered. The costs for the backordered units are the lost profits, because we are not able to satisfy all customers orders. Though, DB032 is a new product we have a lot of units in stock, because the lot size is oversized for its weekly demand. Such things result in unnecessary inventory holding costs and the mentioned increase of the capacity of the warehouse. These two products reveal the inefficiency of the status quo and the need for an inventory management system. II. Introducing an inventory management system: Due to the fact that the demands for each week are uncertain and DB032 is a new item, for which the demand can change anytime, we decided to choose an EOQ Model for uncertainty, therefore, we would have a Safety Stock. In addition, we choose a cycle-service level of at least 95%. According to this, the probability of running out of stock is less or equal 5%. For the calculation we projected the demand for a whole year on the basis of the given data for the two products. Furthermore, we did not add shipping charges to ordering cost, because this fee is paid by the customers. By introducing an inventory management system the ordering costs for both products in total would be reduced by almost $ 309 a year and the annual cycle inventory by round about 287 units. The detailed calculation and assumptions for each product can be found in the attached Excel-spreadsheet. In the following table the change (reduction) in the Total Inventory Cost can be found:
Total Inventory Costs

EG151
Without an inventory system: With an inventory system: Cost reduction: Cost reduction in %: 946,90

DB032
509,98

Total
1456,87

660,03 286,87 30,30%

301,78 208,19 40,82%

961,81 495,06 33,98%

According to the results, we recommend Parts Emporium to introduce the shown inventory management system, because they can achieve a high cost (inventory) reduction.

Group #2

OPM 502 Operations Management

- Group Assignment #1 -

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