1.

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. Be sure to present a proper inventory system and recognize all relevant costs.

Let us prepare an inventory system for EG151 exhaust gasket: First we sum up the gasket

sales/demand for the 21 weeks that is given to us. This gives us a total of 2142 gaskets for 21

week period if we divide it by 21 we get average weekly sales of 102 gaskets. As the lead

time for gaskets is two weeks we multiply this quantity by 2 and we get a figure of 204. We

take a safety stock level of one week as this is the half of the lead time and we add this to the

figure of 204 and we get a reorder quantity of 306. This should be the reorder quantity for

EG151. This also means that the average stock will be 204/2 that is 102 plus safety stock 102

that is 204 units.

Now in case of EG151 the gross profit is 32 percent and so the investment in the inventory

will be 68% of $12.99 that is $8.83. The cost of carrying this will be 21 percent that is $1,85.

If we multiply this by 204 units found above we get a yearly cost of $337.4. Now if the

ordering is done once every two weeks then the ordering cost will be 26 X $20 = $520. if this

is added to the above cost we get a total of $857.4.

Let us prepare an inventory system for DB032 drive belts: First we sum up the gasket

sales/demand for the 11 weeks that is given to us. This gives us a total of 520 drive belts for

11 week period if we divide it by 11 we get average weekly sales of 47,27 drive belts. As the

lead time for drive belts is three weeks we multiply this quantity by 3 and we get a figure of

142. We take a safety stock level of one and half week as this is the half of the lead time and

we add this to the figure of 71 and we get a reorder quantity of 142. This should be the
reorder quantity for DB032. This also means that the average stock will be 142/2 that is 71

plus safety stock 71 that is 142 units.

Now in case of DB032 the gross profit is 48 percent and so the investment in the inventory

will be 52% of $8,89 that is $4,67. The cost of carrying this will be 21 percent that is $0,98.

If we multiply this by 142 units found above we get a yearly cost of $139,3. Now if the

ordering is done once every three weeks then the ordering cost will be 17 X $10 = $170. if

this is added to the above cost we get a total of $309.3.

2. By how much do your recommendations for these two items reduce annual cycle

inventory, stockout, and ordering costs?

In case of EG151 the current cost has two components the cost of reordering and stock out

costs. The ordering costs can be found out by (2142 X2)/ 150 since the size of ordering is 150

now. This gives us $572. However, currently there is a back order of 11 pieces. Since we

have no other data we take 11 to be the average shortage at the end of every week. So we

multiply this quantity with the cost 32 percent of $12.99 X 11 X 52 = $2377.68. We must add

the ordering cost of $572 to it giving us $2949.68. If we subtract the cost that we have

calculated in our proposed system that is $859,40 we get a cost reduction of $2090.20 if we

follow my system.

In case of DB032 the current cost has two components the cost of reordering and stock out

costs. The ordering costs can be found out by (520/11 X 52)/ 1000 since the size of ordering

is 1000 now. That is 2.5 orders. This gives us a cost of $25. Each order costs $10. Again by

observation we have found that there is a stock of 324 parts. We take this to be the data for
stock and as calculated above we get the cost of $0,981 X 324 = $3178.44 the cost of

carrying the stock. We add to this $25 the ordering cost giving us a total of $3193.30.

However, as calculated above the cost according to our recommendation is $309.30. This will

lead to a reduction of $2884.14.