CASE: Parts Emporium Parts Emporium, Inc., is a wholesaledistributor of automobile parts formed by two disenchanted automechanics, Dan Block and Ed Spriggs. Originally located in Block’sgarage, the firm showed slow but steady growth for 7 years beforeit relocated to an old, abandoned meat-packing warehouse onChicago’s South Side. With increased space for inventory storage,the company was able to begin offering an expanded line of autoparts. This increased selection, combined with the trend towardlonger car ownership, led to an explosive growth of the business.Fifteen years later, Parts Emporium was the largest independentdistributor of auto parts in the north central region. Recently,Parts Emporium relocated to a sparkling new office and warehousecomplex off Interstate 55 in suburban Chicago. The warehouse spacealone occupied more than 100,000 square feet. Although only ahandful of new products have been added since the warehouse wasconstructed, its utilization increased from 65 percent to more than90 percent of capacity. During this same period, however, salesgrowth stagnated. These conditions motivated Block and Spriggs tohire the first manager from outside the company in the firm’shistory. It is June 6, Sue McCaskey’s first day in the newlycreated position of materials manager for Parts Emporium. A recentgraduate of a prominent business school, McCaskey is eagerlyawaiting her first real-world problem. At approximately 8:30 A.M.,it arrives in the form of status reports on inventory and ordersshipped. At the top of an extensive computer printout is ahandwritten note from Joe Donnell, the purchasing manager:“Attached you will find the inventory and customer serviceperformance data. Rest assured that the individual inventory levelsare accurate because we took a complete physical inventory count atthe end of last week. Unfortunately, we do not keep compiledrecords in some of the areas as you requested. However, you arewelcome to do so yourself. Welcome aboard!” A little upset thataggregate information is not available, McCaskey decides torandomly select a small sample of approximately 100 items andcompile inventory and customer service characteristics to get afeel for the “total picture.” The results of this experiment revealto her why Parts Emporium decided to create the position she nowfills. It seems that the inventory is in all the wrong places.Although an average of approximately 60 days of inventory is onhand, the firm’s customer service is inadequate. Parts Emporiumtries to backorder the customer orders not immediately filled fromstock, but some 10 percent of demand is being lost to competingdistributorships. Because stock-outs are costly, relative toinventory holding costs, McCaskey believes that a cycle-servicelevel of at least 95 percent should be achieved. McCaskey knowsthat although her influence to initiate changes will be limited,she must produce positive results immediately. Thus, she decides toconcentrate on two products from the extensive product line: theEG151 exhaust gasket and the DB032 drive belt. If she candemonstrate significant gains from proper inventory management forjust two products, perhaps Block and Spriggs will give her thebacking needed to change the total inventory management system. TheEG151 exhaust gasket is purchased from an overseas supplier,Haipei, Inc. Actual demand for the first 21 weeks of this year isshown in the following table: Week Actual Demand WK1 104 WK2 103WK3 107 WK4 105 WK5 102 WK6 102 WK7 101 WK8 104 WK9 100 WK10 100WK11 103 WK12 97 WK13 99 WK14 102 WK15 99 WK16 103 WK17 101 WK18101 WK19 104 WK20 108 WK21 97 A quick review of past orders, shownin another document, indicates that a lot size of 150 units isbeing used and that the lead time from Haipei is fairly constant at2 weeks. Currently, at the end of week 21, no inventory is on hand,11 units are backordered, and the company is awaiting a scheduledreceipt of 150 units. The DB032 drive belt is purchased from theBendox Corporation of Grand Rapids, Michigan. Actual demand so farthis year is shown in the following table: Week Actual Demand WK1118 WK12 33 WK13 53 WK14 54 WK15 51 WK16 53 WK17 50 WK18 53 WK19 54WK20 49 WK21 52 Because this product is new, data are availableonly since its introduction in week 11. Currently, 324 units are onhand, with no backorders and no scheduled receipts. A lot size of1,000 units is being used, with the lead time fairly constant at 3weeks. The wholesale prices that Parts Emporium charges itscustomers are $12.99 for the EG151 exhaust gasket and $8.89 for theDB032 drive belt. Because no quantity discounts are offered onthese two highly profitable items, gross margins based on currentpurchasing practices are 32 percent of the wholesale price for theexhaust gasket and 48 percent of the wholesale price for the drivebelt. Parts Emporium estimates its cost to hold inventory at 21percent of its inventory investment. This percentage recognizes theopportunity cost of tying money up in inventory and the variablecosts of taxes, insurance, and shrinkage. The annual report notesother warehousing expenditures for utilities and maintenance anddebt service on the 100,000-square-foot warehouse, which was builtfor $1.5 million. However, McCaskey reasons that these warehousingcosts can be ignored because they will not change for the range ofinventory policies that she is considering. Out-of-pocket costs forParts Emporium to place an order with suppliers are estimated to be$20 per order for exhaust gaskets and $10 per order for drivebelts. On the outbound side, the company can charge a delivery fee.Although most customers pick up their parts at Parts Emporium, someorders are delivered to customers. To provide this service, PartsEmporium contracts with a local company for a flat fee of $21.40per order, which is added to the customer’s bill. McCaskey isunsure whether to increase the ordering costs for Parts Emporium toinclude delivery charges.

Put yourself in Sue McCaskey's position and prepare a detailedreport to Dan Block and Ed Spriggs on managing the inventory of theEG151 exhaust gasket and the DB032 drive belt.

Write a 1,050- to 1,400-word report.

Discuss Parts Emporium supply chain andpossible remedies for its supply chain problems.

Present a proper inventory system and recognizeall relevant costs.

Discuss how your recommendations for these twoitems will reduce the annual cycle inventory, stock-out, and ordercosts.

Include strategic and tactical changes thatmight improve the company's inventory performance, reducevariability, and improve customer service.

Format your paper consistent with APAguidelines.