INSTA POT; THE SERVICE DEPARTMENT

Winston Quick, owner of Insta Pot, recognized the need to organize a separate department to deal with service parts for the Insta Pot his company makes. The competitive strength of his company was developed around customer responsiveness of his product. He decided that a separate department focused exclusively on after-market service was critical in meeting this mission.
Winston established the department and named Beverly Pann, of his best clerical employees, to be department. Manager. In the beginning, the department operated in a small corner of the warehouse, but has now grown to occupy its own 50,000 square foot building. The service business has also grown substantially and now represents over 22% of the total revenue of Insta Pot. The exclusive mission of the service department is to provide parts (knobs, seals, lids, basket inserts, etc.) to the many retail businesses that sell and service Insta Pot.
While Beverly has proven to be an effective manager and now holds the title of Director of Aftermarket Service, she still lacks a basic understanding of materials management. Jimmy Potts was hired to help Beverly develop a more effective materials management program.
The Current Situation
Jimmy Potts requested information regarding materials and realized the challenges that lay ahead for the company. One of the first items he requested was a status report on inventory history and shipped orders. The following note was left on his desk by the warehouse supervisor:
We could not compile the history you requested, as we keep no such records. There is just too
much stuff here to keep a close eye on it all. However, we feel that the inventory positions on
file is accurate, as we just completed our physical count of inventory last week. I was able to
track down a demand history for a couple of our items and that is attached to this memo.
Welcome to the job!
Jimmy decided to investigate further. By the end of his second week, he was able to paint a good picture of the situation based on 50 parts selected at random. There was an average of 50 days worth of inventory (annual sales/annual inventory). The fill rate for customer orders was less than 70%, which meant that only 70% of the items requested were being shipped and assumed not to be in inventory. The outstanding items were backordered. Many customers viewed service parts as generic and would take their business elsewhere when parts were not available from Insta Pot. Insta Pot was affected when those businesses sometimes cancelled their entire order for parts and placed it with another parts supplier. Jimmy’s conclusion was that there was plenty of inventory, but the timing and quantities were misplaced. Increasing the inventory did not appear to be the solution. There was already a large amount of inventory in the warehouse, but utilization of the space in the warehouse which was built less than 1 year ago had increased from being 40% utilized to its’ present utilization of 90%.
Jimmy decided to start his analysis and development of solutions on two items that he had been provided demand history. If he could analyze and correct any problems with these two parts, then he could expand his analysis to other parts. The two items in which he had history were IP205-inner seal ring and IP756-inner basket liner. The IP205-inner seal was produced by a company in China. The lead time has remained constant, at four weeks, and the estimated cost was 15.90 per order. Insta Pot uses an order lot size of 100 for the IP205 and buys the item for $5.01 per piece.
The IP756, inner basket liner is purchased from a Germany supplier. The German company has a reliable five-week lead time. The cost of placing an order is $20.41 but Insta Pot orders 1,000 parts at a time and pay $9.56 per item.
The demand information for the IP205 and IP756 are as follows:

Jimmy realized he also needed Beverly’s input on her perspective on the business. She indicated that there was a need for better management and Insta Pot should be able to use the existing warehouse for many years, even with the anticipated growth in business. She did comment that the current situation is a crisis as the inventory is “bursting at the seams”. Beverly also stated that the warehouse operation is causing the company to lose a lot of money and further, the service level is poor at 70%. She also states that she would like to see a 95% or better service level without any back orders, and this needs to be done with a net reduction in total inventory. Beverly poses the question to Jimmy asking for his opinion “Can Insta Pot do better?”
Questions
1. Compare the inventory costs associated with your suggested order quantities with those of the current order quantities. What can you conclude?