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Case Study Parts Emporium

Q.no.1
Put in yourself in Sue McCaskey’s position and prepare a detailed report to Dan Block and
Liya Kimathi on managing the inventory of the EG151 exhaust gasket and the DB032 drive
belt. Be sure to present a proper inventory system and recognise all relevant costs?
Parts emporium is a wholesale company of automobile parts formed by two auto mechanics,
Dan Block and Liya Kimathi. Originally located in Block’s garage, the firm showed slow but
steady growth for 7 years. Fifteen years later, parts emporium was the largest independent
distributor of auto parts in the north central region. Recently parts emporium relocated to a
sparkling new office and warehouse. Its utilization increased from 65%to more than 90% of
capacity.
Inventory management, the planning and controlling of inventories to meet the competitive
priorities of the organization, is an important concern for managers in all types of businesses.
(Krajewski & Malhotra, 2021)
There are two inventory systems, one is a continuous inventory system that uses an item or SKU
to determine when it is time to reorder. Each time a withdrawal is made, the remaining stock is
traced 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.
The 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. The benefit of a periodic review system is that delivery scheduling is simplified
because it is routine and constant (Krajewski & Malhotra, 2021).
If I were Sue McCaskey’s position, I would strive to meet substantial changes in the way
inventory is controlled in Parts Emporium Inc. The three major problems that Parts Emporium is
facing includes:

 The utilization of the warehouse capacity increased from 65 to 90 percent indicating

higher inventory holding costs along with stagnant sales growth.
 Customer orders are often not met due to the inadequacy of the firm’s customer service
and hence, Parts Emporium backorders such orders which are not fulfilled through stock.
This results in a loss of about 10 percent of demand due to the presence of other
competitive distributors.
 Furthermore, no such aggregate information regarding the inventory is available, and
the company does a physical count of the inventory at the end of the week. 
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For the inventory system I will choose the continuous inventory as the review frequency of each
SKU may be individualized which can reduce total ordering and holding cost. The system
requires a low level of safety stock for uncertainty in demands during the lead time. (Krajewski
& Malhotra, 2021)
Here data for two products EG151 Exhaust gas kit and DB032 Drive belt is given. The
calculations for the inventory system are.
Given Data
EG151 exhaust gas kit
Lot size = 150 units
Lead time = 2 weeks
Inventory on hand=0
Backorder= 11 units
Price= 12.99$
Gross margin = 32%
Ordering cost = 20$
Holding cost= 21% of its inventory investment
DB032 Drive belts
In hand inventory= 324
Lot size= 1000 units
Lead time = 3 weeks
Price = 8.89
Ordering cost = 10 $
As I have seen that demand is variable and lead time is constant, in Q system when demand is
variable, we will calculate EOQ, safety stock to handle variable demand, and reorder point,
Ordering cost and inventory holding cost. Time between order in Q system when demand is
variable will not b same TBO 1# TBO2 # TBO3 (Krajewski & Malhotra, 2021).
EOQ can help us better understand how much we need to re-order and how often. By
calculating how much we need based on how much we sell in a given period of time, we can
avoid stockouts without having too much inventory on hand for too long (Callarman, 2020).
EG151 exhaust gas kit
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Weekly average demand = 102 units

Annual demand = 102*52 = 5304 Units

Holding Cost = 0.21 * 0.68 * 12.99 = 1.85$

Ordering cost = 20$

EOQ for EG151 = √((2×D×S)/H = √ ((2×5304×$20)/$1.85) = 339 gas kits

Because of uncertainty, demands during lead time are unpredictable and back orders or stock
out can occur. That is why managers add safety stock to hedge against lost sales. It also explains
why the on-hand inventory usually does not drop to 0 by the time a replenishment order arrives
for well-designed continuous review system (Krajewski & Malhotra, 2021)
Standard deviation for 95% service level is 1.65, as I want to increase service level from 90% to
95% so must add safety stock to handle backorders.
Safety Stock (SS) =3.41×1.65=5.63
=6 units.
Reorder point when is equivalent to the sum of the Average weekly demand during lead time
and the safety stock.
Reorder point= Average demand during lead time + safety stock
Reorder point = (2×102) +6
=210 units EG151

DB032 Drive belts

Weekly average demand = 48
Annual demand = 48*52 = 2496 units
Holding cost = 0.21×0.52×8.89 = .97$
Ordering cost = 10$
EOQ for DB032 = √[(2×D×S)/H] = √ [(2×2496×$10)/$0.97] = 227 drive belts
Safety Stock (SS) = (3×1.65) = 4.95 units = 5 units
Reorder point is sum of the average weekly demand and the safety stock.
Reorder point= (3×48) +5
=149 units DB032.
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Q.no.2
By how much do your recommendations for these two items reduce annual cycle inventory,
stockout, and ordering cost?
The primary lever to reduce cycle inventory is simply to reduce the lot sizes of items moving in
the supply chain (Krajewski & Malhotra, 2021). However, making such reductions in Q we must
check changes in ordering cost and holding cost.
The cost demonstration for the exhausted gasket EG151 is as follows:
Current cost = Holding Cost + Order Cost
= (Q/2) H + (D/Q) S
= (150/2) × $1.85 + (5304/150) ×$20
= $138.75 + $707.2
Current Cost = $845.95
Cost after ordering proper quantity =(Q/2) H + (D/Q) S
= 339/2× 1.85 + 5304/339 × 20
=$313.5+ $ 313
Cost after measuring economic order quantity = 627 $
Saving = $845.95-$627
= $218.95
The cost demonstration for the Drive belt DB032 is as follows:
Current cost = Holding Cost + Order Cost
= (Q/2) H + (D/Q) S
= (1000/2) × $.97 + (2496/1000) ×$10
= $485 + $25
Current Cost = $510
Cost after ordering proper quantity =(Q/2) H + (D/Q) S
= 227/2× .97 + 2496/227 × 10
=$110+ $110
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Cost after measuring economic order quantity = 220 $

Saving = $510-$220
= $290
So based on these calculations, I would recommend that Sue McCaskey’s management make a
conscious effort to enhance the Parts Emporium inventory management method by introducing
a comprehensive evaluation process for Emporium products. Controlling their inventory would
be crucial to their success, which would reduce inventory issues.

 For these two products there should be Economic order quantity of 339 Gaskets and 227
belts. This will reduce overall 508$ cost only for two products. As lot size is increased for
gaskets to overcome the stockout which will increase holding cost, but decreased
ordering cost ultimately total cost reduced. Lot size of belts is reduced to 227 which will
reduce holding cost of inventory.
 Back orders are costly to fulfil, they are even more expensive when it causes the loss of
future demand. As we calculated reorder point, safety stock by implementing this parts
emporium can save their 10% sale and can achieve 95 % service level.
 By reducing cycle inventory, inventory turnover will increase, and this investment can be
utilized somewhere else.
 This is evaluation of only two products which gives us real insight of inventory position in
Parts Emporium, there is need to reevaluate the whole inventory stock to do more
changes and hence will improve system as well as reduce cost.
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References

Callarman, S. (2020, February 26). Economic Order Quantity: How Can EOQ Help You

Minimize Costs & Save Space. ShipBob. https://www.shipbob.com/blog/economic-order-

quantity/#:~:text=Also%20referred%20to%20as%20

Muller, M. (2019). Essentials of inventory management. HarperCollins Leadership, an imprint of

HarperCollins.

Krajewski, L. J., Ritzman, L. P., & Malhotra, M. K. (2022). Operations Management:

Processes and Supply Chains (13th ed.). Pearson Education