Parts Emporium Case

Parts Emporium Case

Parts Emporium Inc. managed to transform itself from doing business out of a garage to
becoming the largest independent distributor of auto parts in the north central region. In
the past period, inventory capacity rose from 65% to 90% and sales growth has stagnated
causing Parts Emporium to hire an outside manager to figure out where the problem lies.
Parts Emporium Inc. is currently facing numerous problems in relation to their inventory
system. Each problem could be considered both short-term and long-term because both
problems need focus immediately but may take an extended period of time to furnish.
The first problem is in relation to their customer service department. The customer
service department puts orders on backorder that are not immediately filled from stock.
This mistake is leading to 10% of the demand being lost to competitors. The next
problem is the need to change the inventory management system. When the new
manager, McCaskey, requested inventory and customer service data from the warehouse,
several areas did not have inventory records. Without a full functioning system in place
that takes inventory of all the products in the warehouse, there is no way to tell where
money is being lost and how to rectify the situation.
Two alternatives the managers of Part Emporium Inc. should consider are two different
inventory systems. First, a continuous review inventory system uses an items SKU, or
stock-keeping unit to determine when it is time to reorder. Each time a withdrawal is
made, the remaining stock is tracked which helps determine when the item is running low
enough to reorder. Within this inventory system, the amount ordered each time is fixed
but the time in between orders varies. A benefit of this system is that with a computer
system in place that keeps track of each withdrawal, the inventory review can be done
continuously so the most up to date information is available. The next alternative is to
choose a periodic inventory system. In this inventory system, the inventory is checked on
a periodic basis rather than continuously. Within this system, the amount ordered each
time may change but the time between each order remains the same. A benefit of a
periodic review system is that delivery scheduling is simplified because it is routine and
constant.
If I were Sue McCaskey, I would strive to make substantial changes in the way inventory
is controlled in Parts Emporium Inc. I would first consider my first impression of Joe
Donnell, the purchasing manager that presented the status reports on inventory and orders
shipped. The fact that he did not have records for all areas of inventory is a blatant act of
laziness and incompetence. I would request to have Donnell demoted and someone else
put in his place that can maintain accurate and current inventory records under the new
inventory system. Next, I would look into the inadequate manner of the customer service
department. I would set up training courses to educate our customer service
representatives how to view where our inventory position is. This will include if there are
any scheduled receipts or if the item is on backorder (see calculations at end). After
reviewing the calculations from the continuous inventory system and the periodic

inventory system for the two products EG151 and DB032, it is clear which system would
be best for Parts Emporium Inc. I would choose the continuous inventory system because
it would yield the least amount of total costs for both products (see calculations at end).
This inventory system uses real-time inventory tracking through an automated system to
know exactly where inventory is at any given time. With the continuous inventory system
in place, there will be a designated reorder point of 171 units. When our inventory
reaches 171 units an order will be placed helping to eliminate the chance of stock outs
(see calculations at end). Implementing this new inventory system will help reduce stock
outs and maintain a cycle service level of 95% at a lesser cost than the periodic system.
By appointing a more appropriate purchasing manager, training our customer service
department and implementing an appropriate inventory management system, I feel Parts
Emporium Inc. can reduce their excess inventory and begin to have increasing profit
margins once again.
Questions:
1)
Mr. Block and Mr. Spriggs:
I have taken it upon myself to test two inventory management systems and have found a
system that will yield the least cost to Parts Emporium Inc. The two systems I have tested
are the Continuous Inventory System and the Periodic Inventory System. Using data that
I have gathered from the products DB032 and the EG151, I have compiled calculations
and have concluded a continuous inventory system would be best for our corporation.
Attached you will find said calculations; I would like to take this moment and present the
continuous inventory system and recognize all of the relevant costs. The following is an
explanation of each calculation under the continuous inventory system:
Economic Order Quantity (EOQ): Our warehouse utilization has increased from 65% to
90%, it is apparent a significant quantity of our money is being tied up in inventory. The
EOQ calculation shows the lot size that will minimize total annual inventory holding and
inventory costs.
DB032: 162 units EG151 279 units.
Safety Stock: I have concluded to keep our customers happy and to end losing 10% of
our demand to our competitors we must maintain a 95% cycle-service level. Maintaining
the amount of calculated safety stock will ensure there is only a 5% probability of a stock
out.
DB032: 30 units EG151:6 units
Reorder Point (ROP): As inventory is tracked on a continuous basis, we can determine at
what level of inventory we should reach before we order another shipment. The reorder

point shows the number of units our inventory will reach before another lot size will be
ordered.
DB032: 171 units EG151: 210 units
Total Cost (TC): This calculation includes annual cycle inventory holding costs, annual
ordering costs and annual safety stock holding cost.
DB032: $359.30 EG151:$777.44
Total Cost under Periodic System:
DB032: $388.20 EG151: $792.28
2) My recommendations for these two items reduce the following calculations as so:
Annual cycle inventory: Currently Parts Emporium Inc. has approximately 60 days of
inventory on hand. Through the proposed system, the average stock on hand will be the
amount of inventory to satisfy demand during the lead-time.
Stock out: Currently, Parts Emporium Inc. is losing 10% of its demand to its competitors.
By running at a 95% cycle level will reduce the chance of stock out to 5%. A less
possibility of stock out will mean more satisfied customers and a less of our sales being
lost to competitors.
Ordering Costs: With the new inventory system in place, delivery charges did not have to
be added to ordering costs. This is because less money will be tied up in inventory and
there will be less of a possibility of stock out, which will help rejuvenate sales growth.