Parts Emporium, Inc., is a wholesale distributor of automobileparts formed by two disenchanted auto mechanics, Dan Block and EdSpriggs. Originally located in Block’s garage, the firm showed slowbut steady growth for 7 years before it relocated to an old,abandoned meat-packing warehouse on Chicago’s South Side. Withincreased space for inventory storage, the company was able tobegin offering an expanded line of auto parts. This increasedselection, combined with the trend toward longer car ownership, ledto an explosive growth of the business. Fifteen years later, PartsEmporium was the largest independent distributor of auto parts inthe north central region. Recently, Parts Emporium relocated to asparkling new office and warehouse complex off Interstate 55 insuburban Chicago. The warehouse space alone occupied more than100,000 square feet. Although only a handful of new products havebeen added since the warehouse was constructed, its utilizationincreased from 65 percent to more than 90 percent of capacity.During this same period, however, sales growth stagnated. Theseconditions motivated Block and Spriggs to hire the first managerfrom outside the company in the firm’s history. It is June 6, SueMcCaskey’s first day in the newly created position of materialsmanager for Parts Emporium. A recent graduate of a prominentbusiness school, McCaskey is eagerly awaiting her first real-worldproblem. At approximately 8:30 A. M., it arrives in the form ofstatus reports on inventory and orders shipped. At the top of anextensive computer printout is a handwritten note from Joe Donnell,the purchasing manager: “Attached you will find the inventory andcustomer service performance data. Rest assured that the individualinventory levels are accurate because we took a complete physicalinventory count at the end of last week. Unfortunately, we do notkeep compiled records in some of the areas as you requested.However, you are welcome to do so yourself. Welcome aboard!” Alittle upset that aggregate information is not available, McCaskeydecides to randomly select a small sample of approximately 100items and compile inventory and customer service characteristics toget a feel for the “total picture.” The results of this experimentreveal to her why Parts Emporium decided to create the position shenow fills. It seems that the inventory is in all the wrong places.Although an average of approximately 40 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 12 percent of demand is being lost to competingdistributorships. Because stockouts are costly, relative toinventory holding costs, McCaskey believes that a cycle-servicelevel of at least 99 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 Week Actual DemandWeek Actual Demand 1 84 8 87 15 86 2 85 9 85 16 85 3 88 10 87 17 824 87 11 85 18 83 5 85 12 83 19 85 6 85 13 83 20 85 7 84 14 84 21 87A quick review of past orders, shown in another document, indicatesthat a lot size of 500 units is being used and that the lead timefrom Haipei is fairly constant at 2 weeks. Currently, at the end ofweek 21, no inventory is on hand, 11 units are backordered, and thecompany is awaiting a scheduled receipt of 200 units. The DB032drive belt is purchased from the Bendox Corporation of GrandRapids, Michigan. Actual demand so far this year is shown in thefollowing table: Week Actual Demand Week Actual Demand Week ActualDemand 11 16 15 45 19 48 12 29 16 47 20 43 13 47 17 44 21 45 14 4818 47 Because this product is new, data are available only sinceits introduction in week 11. Currently, 324 units are on hand, withno backorders and no scheduled receipts. A lot size of 500 units isbeing used, with the lead time fairly constant at 3 weeks. Thewholesale prices that Parts Emporium charges its customers are$12.50 for the EG151 exhaust gasket and $8.80 for the DB032 drivebelt. Because no quantity discounts are offered on these two highlyprofitable items, gross margins based on current purchasingpractices are 40 percent of the wholesale price for the exhaustgasket and 36 percent of the wholesale price for the drive belt.Parts Emporium estimates its cost to hold inventory at 20 percentof 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$30 per order for exhaust gaskets and $20 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. Questions: 1. Provide brief answers(including the necessary explanations) to the following questions(no calculations are needed for these questions): i. Enumeratethree major problems that Parts Emporium is facing. ii. McCaskeydecided to randomly select a small sample of approximately 100items and compile inventory and customer service characteristics toget a feel for the “total picture.” Can you suggest a betterstrategy? iii. Why limiting the study to two items only? iv. ShouldMcCaskey increase the ordering costs for Parts Emporium to includedelivery charges? v. What is the current inventory system? vi. Whatis the current level of service? vii. What is the proposedinventory system? Why? viii. How to convince the Executives of thecompany to adopt your recommendations? ix. How would thecalculations for the two products be similar? How would they bedifferent? x. What will be the next step for McCaskey if Block andSpriggs give her the backing needed to change the total inventorymanagement system? 2. Complete the table below for the EG151 andshow your detailed calculations in a separate file to be submittedas attachment (Excel, OM Explorer or POM doe Windows). CurrentProposed % Change How much to order? When to order? Ordering plusholding cost per year: Estimated lost sales (in %): Estimated costof lost sales per year: Total Cost per year: Most urgent action:The following questions are required only for the students who aresubmitting individually: 3. What is the role that IT can play insolving the problems faced by Parts Emporium? 4. How were internetsources helpful to you in solving this case?