Parts Emporium & Industrial Repair Inc - Coursework Example

?PARTS EMPORIUM & INDUSTRIAL REPAIR INC al Affiliation) Case Question Before I present my argument, I would like to recognize the facts of the case with regard to the EG151 exhaust gasket. The first fact is that there is too much backordering of the product, which in turn leads to loss of demand and market to other competing distributors. The new warehouse which cost $1.5 million is also massively underutilized, because a 100,000 square foot warehouse should be able to hold the firm’s EG151 and DB032 inventories for at least 12 months. Another fact is that the company orders insufficient stocks from its supplier. A week’s demand of the EG151 gasket averages 100 units, but the company orders just 150 units every 2 weeks, so there is insufficient supply coming in. This fact alone already puts the company at risk of getting its inventory overrun by demand, hence losing money and market in the end. There is also no denying the fact that until now, the company’s inventory has generally been poorly managed and maintained. When it comes to the DB032 drive belt, its case appears to be the exact opposite of the EG151 exhaust gasket. Currently, the company orders too many units of the product, thus ending up with a lot of leftover stocks. In business, the wise thing to do is always to maintain a balance between supply and demand; the firm is supplying too much DB032s. More importantly, there is no justification of this whatsoever. The firm has a lot size of 1,000 units for a product whose demand averages 50 every week; it also has 324 units on hand. A comparison of the company’s treatment of the DB032 drive belt and the EG151 exhaust gasket reveals that it has gotten its priorities completely wrong. The more in-demand product (EG151 exhaust gasket) has been given a small lot size and is undersupplied, while the less in-demand product (DB032 drive belt) has been given a large lot size and is overstocked to the extent that almost 3 weeks’ supply is on hand. In order to solve this problem, it is necessary to develop a better and more efficient inventory system. I propose the following: For the EG151 Exhaust Gasket At least 150 units should be ordered every week so as to cushion the company from stockout and an inability to meet demand. In addition to this, the product should be given a larger lot size that can allow its inventory to be sufficiently built and maintained. The company should also improve the efficiency of its supply chain system so that backordering is reduced, losses are avoided, and market share is maintained or even gained. For the DB032 Drive Belt The lot size allocated to a product that sells an average of just 50 units each week is too much and not realistic. Allocating a lot size of 1,000 units to this product is almost criminal considering the EG151 exhaust gasket undersells and yet is given a lot size of just 150 units. Secondly, the company orders too many units of the DB032 drive belt, to the extent that surplus units are left in stock while demand remains low. Recommendations a) Reduce the lot size of the DB032 drive belt to 100 units, and increase the lot size of the EG151 exhaust gasket to 300 units. b) Increase the orders for the EG151 exhaust gaskets to 210 every two weeks, and reduce the orders for the DB032 drive belt to 150 units every 3 weeks. c) Slash or completely eliminate the tendency to backorder. d) Make better use of the warehouse, which is grossly underutilized. Question 2 The EG151 exhaust gasket costs $20 per order, while the DB032 costs $10 per order. Currently, the company orders 150 units of the EG151 every 2 weeks, meaning it spends $3,000 every 14 days. For the DB032 drive belt, since the company has a lot size of 1,000 units it most likely orders that quantity every 3 weeks. This means that it spends $10,000 every 21 days. Total costs come to $13,000 every 35 days. My recommendation would mean that the company will spend $4,200 on the EG151 every 14 days and $1,500 on the DB032 drive belt every 3 weeks, totaling to $5,700 every 35 days. My recommendation would therefore reduce inventory and ordering costs by $7,300. The EG151 exhaust gasket is the only product that is backordered hence the company incurs stockout costs. By eliminating backordering of 11 units, the company will save $220 (11 * 20). Case 2 Question 1 Using one facility, the best location is 1 hour away from the firm’s current plant. The logic behind this is that the firm’s customers are more than 30 minutes away, so 1 hour would be a middle point. Using straight-line depreciation, annual depreciation will be 100,000/10, which is 10,000. By the end of the 10 years the book value of the facility will be zero. However, the salvage value and the cash inflows have not been provided so the net present value will be impossible to calculate. Also, information regarding location and distribution of the company’s customers is not provided, so the percentage of repairs that are within 30 minutes of the chosen location will be impossible to calculate. Question 2 Using 2 facilities, the new plant will also be located 1 hour away. With this option, only additional operating expenses will be incurred, so this can be considered as a cash outflow. However, cash inflows have not been provided so the net present value (NPV) will be impossible to calculate. In addition to this, the straight-line method of depreciation will not apply because of the scanty information available. Finally, since information on the location and distribution of the firm’s customers has not been in this case as well, the percentage of repairs that are within 30 minutes of the chosen location will be impossible to calculate. Question 3 Andrew should advise the company to relocate the current facility to a location that is 1 hour away from the current premises. The logic behind this is that since most of the company’s customers are more than 30 minutes away from the current premises, moving one hour away will give the firm a balanced access to its customers. In addition to this, choosing to relocate rather than maintain 2 facilities is better in the long-term. The reason for this is that relocation is a one-time expense that is not likely to be incurred again. On the other hand, additional operating expenses will be incurred as long as the facility operates, and will dwarf the relocation expenses involved in simply moving the plant and maintaining it. References Verweij, K. 2002, Managing inventories with virtual warehousing, HIDC, The Hague. Read More