Criminal
Boston2019
BusinessBriefPartsEmporium.edited.docxTo: Dan Block and Ed Spriggs, Owners
From: Sue McCaskey, Materials Manager
Subject: Parts Emporium Inventory Management
Date: February 17, 2020
Business Brief
Parts Emporium Inc. faces a crisis of high magnitude as it pertains to inventory management. Currently, some products are overstocked and some are understocked resulting in high holding costs for the excess, and back-ordered products for the ones that are understocked. Two examples will be shown in the EG151 exhaust gasket and the DB032 drive belt and how proper inventory management will result in lower costs and increased customer satisfaction.
Analysis
Managing the inventory of these two products will require information to be compiled diligently to gain an accurate assessment of the company’s needs. Finding the Economic Order Quantity (EOQ) and orders per year from the information available will show levels where holding/ordering costs are minimized while still meeting annual demand. Appendix C provides figures determined from the first 21 weeks status report on EG151 and Appendix D uses the status report for DB032. The EOQ for EG151 is 339 units and DB032 is 237 units. The amount of orders per year for EG151 is 16 and DB032 is 12. Total ordering plus holding cost for EG151 will be $634.42 and $235.04 for DB032. Those order quantities and the number of orders will lead to those minimized costs while being able to meet annual demand which is fairly consistent for both products month to month based on the data.
Currently, the quantity ordered for EG151 is 150 units and DB032 is 1,000 units. Compared to the ideal cost-minimizing EOQ the order size for EG151 is too small and DB032 is too large. This is resulting in no inventory on hand and back-ordered product for EG151, and too much inventory on hand for DB032. Both of these issues are costing Parts Emporium money. The number of orders required to meet annual demand with these lot sizes is 36 orders for EG151 and 3 for DB032. Referring to Appendix C and D will show that current ordering plus holding costs for EG151 are $859.12 and $515.39. Both of these amounts are significantly higher than the total costs of the products when ordered with EOQ.
An inventory control system is also needed to handle when and how much inventory is ordered from Haipei for the EG151 and Bendox for the DB032. A continuous review system would be a legitimate option. Inventory is reordered when it is depleted to a certain point, whereas it can still handle sales volume during the lead time waiting for the next shipment. Using the average weekly sales volume and the lead time the reorder point can be calculated as 204 units for EG151 and 156 units for DB032.
Conclusion
The type of inventory model that should be implemented for products EG151 and DB032 is a fixed order quantity model. This will lead to inventory being reordered at an optimal time reducing holding costs and avoiding back-ordered products. Using the fixed order quantity model to order EOQ will save $224.71 on EG151 and $280.36 on DB032. Once the benefits from these two products new inventory management are realized the same method can be implemented for other products Parts Emporium sells.
APPENDIX A:
Step 1: Identify the problem(s) and uncertainties.
What exactly is the problem…
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The problem is that Parts Emporium is having inventory management issues as they have grown so they have hired a materials manager to help solve it. |
The problem is this …
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Inventory is stockpiling for some items and is out of stock for other items. |
This is an important problem because…
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Ordering costs are high for items that are low in order quantity, also leading to backorders due to constantly waiting on replenishment of inventory. Handling costs are high for items that are overstocked and sitting in the warehouse in large quantities. |
The key question(s) that needs to be answered to solve this problem is…
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How much inventory should be ordered, and at what point is it re-ordered? |
Step 2: Obtain information.
The following information is needed to answer this question…
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The average annual demand. The current lot size being ordered. The interval at which items are currently being ordered. The number of inventory backordered and inventory stockpiled. |
Some important assumptions I am using in my thinking are…
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The weekly demand is somewhat constant as shown by the charts provided by the purchasing manager. |
The points of view relevant to this problem belong to…
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The owners Dan Block and Ed Spriggs, the purchasing manager Joe Donnel, the workers in the warehouse, and me as the materials manager Sue McCaskey. |
Note: Remember to view the information you have obtained for potential bias. This is from the perspective of your own bias to the research and the bias of the authors who compiled the data and the research you gathered. In other words, do not discount the importance of other’s data because of your own bias (is).
Step 3: Make predictions about the future.
If this problem gets solved, some important implications are…
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The routine will be different for the purchasing manager, the warehouse, shipping and other components of the company. It may take some time to adjust to a different way of operating the inventory management. Extra cash will be available to the company though once the changes have set in and there is the possibility the strategy for the two items could be spread to the rest of the company’s products.
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If this problem does not get solved, some important implications are…
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Inventory will continue to pile up and be expensive to hold in the warehouse for some items, backorders will pile up while awaiting shipments of inventory constantly. By not acknowledging and fixing this problem the issues could spiral out of control to the point of no return. |
The potential alternative solutions to solve the problem are…
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Parts Emporium could add or drop product lines that are not profitable or market products differently. |
Note: if the problem is one-dimensional, there may be just one correct solution.
Step 4: Make decisions by choosing among alternatives.
What is the best solution and why…
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The best solution is to implement the fixed order quantity model which will trigger orders at the re-order points for the two products. Using EOQ the optimal lot size will be determined and from this the amount of orders per year can be found by dividing EOQ from annual demand. Holding and ordering costs will be minimized this way and reflect on the companies bottom line. |
Step 5: Implement the decision, evaluate performance, and learn.
In business, the fifth step in the decision making process is implementation. In the MBA program, most times you will end with Step 4 since you will not have the opportunity to implement. You may be asked to develop an implementation plan and recommend how you will evaluate performance in some assignments.
APPENDIX B:
WEEK 4 BUSINESS BRIEF RUBRIC: PARTS EMPORIUM-INVENTORY
Total of 75 points
|
Criteria |
Unacceptable |
Acceptable |
Proficient |
Student Score and Comments |
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Develops an opening paragraph that introduces the case and identifies the problem from Step 1 of the 5-Step Critical Thinking Decision-Making Model. |
Vaguely develops an opening paragraph that introduces the case and identifies the problem or does not have an opening paragraph.
(0-7 points) |
Develops an opening paragraph that introduces the case and identifies the problem and, for the most part, fulfills assignment requirements.
(8 points) |
Develops an opening paragraph that introduces the case and identifies the problem and demonstrates a solid ability to accomplish the assignment.
(9-10 points) |
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Prepares a detailed report on managing the inventory of the EG151 Exhaust Gasket. Step 2 of the 5-Step Critical Thinking Decision-Making Model. |
Vaguely prepares or does not prepare a detailed report on managing the inventory of the EG151 Exhaust Gasket.
(0-11 points) |
Prepares a detailed report on managing the inventory of the EG151 Exhaust Gasket and, for the most part, fulfills assignment requirements. (12-13 points) |
Prepares a detailed report on managing the inventory of the EG151 Exhaust Gasket and demonstrates a solid ability to accomplish the assignment. (14-15 points) |
|
|
Prepares a detailed report on managing the inventory of the DB032 Drive Belt. Step 2 of the 5-Step Critical Thinking Decision-Making Model. |
Vaguely prepares a detailed report on managing the inventory of the DB032 Drive Belt or completely off the topic.
(0-11 points) |
Prepares a detailed report on managing the inventory of the DB032 Drive Belt and, for the most part, fulfills assignment requirements. (12-13 points) |
Prepares a detailed report on managing the inventory of the DB032 Drive Belt and demonstrates a solid ability to accomplish the assignment. (14-15 points) |
|
|
Presents a proper inventory system recognizing all relevant costs.
Step 2 of the 5-Step Critical Thinking Decision-Making Model. |
Vaguely presents a proper inventory system recognizing all relevant costs or completely off the topic.
(0-11 points) |
Presents a proper inventory system recognizing all relevant costs and, for the most part, fulfills assignment requirements. (12-13 points) |
Presents a proper inventory system recognizing all relevant costs and demonstrates a solid ability to accomplish the assignment. (14-15 points) |
|
|
Clearly recommends cost reductions of annual cycle inventory, stockout, and ordering costs. Step 4 of the 5-Step Critical Thinking Decision-Making Model. |
Vaguely recommends cost reductions of annual cycle inventory, stockout, and ordering costs or completely off the topic.
(0-7 points) |
Recommends cost reductions of annual cycle inventory, stockout, and ordering costs and, for the most part, fulfills assignment requirements.
(8 points) |
Clearly recommends cost reductions of annual cycle inventory, stockout, and ordering costs and demonstrates solid ability to accomplish the assignment. (9-10 points) |
|
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Synthesizes relevant information and materials to provide evidence of critical thought.
|
Synthesizes information at a minimal level.
(0-7 points) |
For the most part, effectively synthesizes information, which supports main ideas.
(8 points) |
Consistently and effectively synthesizes information, which provides strong support to main ideas. (9-10 points) |
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SubTotal Points |
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SafeAssign |
Did not turn paper into SafeAssign Assignment – zero points |
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Revisions based on the Originality Report |
Did not revise the paper based on the originality report. Minus 25 points |
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Grammarly |
Did not revise the paper based on Grammarly. Minus 25 points |
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5-Step Critical Thinking Decision-Making Model |
Did not complete and submit. Minus 40 Points |
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Total Points = |
APPENDIX C: EG151 Inventory Management
APPENDIX D: DB032 Inventory Management
