Tuesday, December 25, 2012

9:45 AM

1.

2.
3.
4.
5.

What is supply chain?

o
Planning (Forecasting)
o
Storage (warehousing, inventories)
o
Movement (transportation)
What are the components of supply chain?
Why SCM is important for business?
What could be the objectives of any supply chain management?
Give some examples of some good supply chain management?

Supply chain costs typically includes the following

Transportation cost

Warehousing costs

Inventory caring costs

Order processing costs

Loss in damages

Loss due to expiries

Loss of sales due to stock outs

Two reasons why supply chain has been important

It offered an opportunity for cost reduction

Source of competitive advantage

Objectives of supply chain

Achieve high levels of productivity

Improve profitability through direct cost reduction

Improve profitability through capital reduction

Consider two companies A & B.

Annual sales of A is 2500 crore. Annual Profit of A is 250 Crores.
Annual sales of B is 2500 crore. Annual Profit of B is 150 Crores.

Consider 3 companies A,B,C. Each of them enters the trading business with an investment of 100 Crores.
Company A buys stocks worth 100 Crores and sell it for 110 crores. It retained the 10 crores with itself
and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 3
months.
Company B buys stocks worth 100 Crores and sell it for 102 crores. It retained the 2 crores with itself
and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 1 week.
Company B buys stocks worth 100 Crores and sell it for 105 crores. It retained the 5 crores with itself
and again buys stocks worth 100 crores. They keep repeating the same process. Each cycle takes 1.5
months.

Calculate the following on annual basis for both the companies

1.
Annual sales
2.
Annual profits
3.
Profit margin
Find out which company is the most profitable

Company

Buys

Sells

Profits

400

440

40

5200

5304

104

800

840

40

Identify 5 initiatives of how a company can increase the profit margins and five initiatives to improve the
capital turnover.

Consider two companies A & B . The annual sales for both is 1 lakh units each. The average cost per unit
is Rs.1000/-. Average inventory in number of days for A = 60 for B = 30. annual interest rate 10% for
both A & B. ware house space heir is for A 5000 sqft. For B 3000 sqft. Warehouse rentals Rs 30/month
for both. Ware house operating cost which includes manpower utilities etc Rs.20/Sqft per month for
both A & B. Calculate the annual warehousing cost and the annual inventory carrying costs for both the
companies.
Company

Annual Sales

100000 units

100000 units

Cost per unit

Rs. 1000

Rs. 1000

Average Inventory

60 days

30 days

Annual interest rates

10%

10%

Warehouse Space

5000 sqft

3000 sqft

Warehouse rentals

Rs. 30/Sqft/month

Rs. 30/Sqft/month

Warehouse operating costs

Rs. 20/sqft/month

Rs. 20/sqft/month

Warehouse cost (A) = 5000*(30+20)*12=3000000

Warehouse cost (B) = 3000*(30+20)*12=1800000

Inventory cost (A)

Units = 100000/365*60=16438.3562
Value= 16438*1000=16438000
Inventory carrying cost= 16438000*10%=1643800
Inventory cost (B)
100000/365*30=8219.1781
8219*1000=8219000
8219000*10%=821900
Inventory carrying cost

(Average inventory in units)*(average cost per unit) * (interest rates)

Inventory carrying cost means the opportunity cost of capital lying idle.

1500/12=125

Wednesday, December 26, 2012

11:48 AM

Companies generally outsource the transportation

60 days of inventory means the company has got so many units in stock which will come for 60 days of
sale
In the year 2010-11 the average sales was 1 lakh each for company A & B. the average inventory was
10000 units for A & B. The next year average sales of company A was 1.5 lakhs & for company B 3 lakhs.
The average inventory was 20000 for A and 20000 for B. calculate the average inventory in number of
days for both A & B.
Company

Annual Sales Year-1

100000 units

100000 units

Average Inventory

10000 units

10000 units

Annual Sales Year-2

150000

300000

Average Inventory

20000 units

20000 units

Number of days of inventory for Year-1

Company(A)

365/100000*10000=36.5 days
Company(B)
365/100000*10000=36.5 days

Number of days of inventory for Year-2

Company(A)
365/150000*20000=48.6667 days
Company(B)
365/300000*20000=24.3333 days
Inventory turn over time

Or

Or

Transportation costs impacts the profit margin

Inventories impact both profit margin and the capital turn over

Reason: inventory appears as assets in balance sheet

inventory appears as interest in P&L statements.

Warehousing impacts profit margin

Order processing impacts both profit margin and capital turnover
Loss due to damages appears in the profit margin and capital turnover
Opportunity loss due to profit margin to stock outs
How are the 3 objectives of supply chain are related to each other?
Objectives of supply chain
Achieve high levels of productivity
Improve profitability through direct cost reduction
Improve profitability through capital reduction

All the three objectives are contradictory to each other or inversely related.

Assume that you have joined a summer internship in a company. The project is to reduce the
supply chain cost. Currently the supply chain cost is 100 crores of which transportation cost 30
crores, inventory carrying cost 50 crores, warehousing cost 10 crores and others 10 crores. Your
project objectives is to identify the initiatives to reduce the supply chain cost. How will you go
about this project. What data you will collect? What analysis you will do and how will you identify
the cost reduction opportunities?
Demand supply match
Mode of transportation
1.

Transportation cost is inversely related to the size of the vehicle.

Drivers would reduce
Toll charges would reduce
Fuel consumption would reduce

2.
3.
4.

Transportation cost significantly changes with mode.

Inventory lot size per order
Transportation cost

5.

Material costs

6.

Stock outs

A company is following the procurement process as below.

They order 1000 units on first day of the month. They receive the same 1000 units the same day.
These are sold through out the month. On the first day of the next month they again order 1000
units and this process continues. The company wants to change the procurement process. Instead
of ordering 1000 units on the first day they want to order 100 units every 3 days. Calculate the
inventory in both the
processes. What would be the other impact because of this change?
Average 521.5
Average 70

What factors decide the average inventory of any industry?

Inventories uncertainties
lead time
reorder interval
product availability
poor information systems
Lot size
Demand
How to reduce the lead time
Develop a local supplier

Monday, December 31, 2012

11:46 AM

A company currently has the manufacturing plant in Pune and they have four warehouses across the
country in Mumbai, Delhi, Calcutta and Bangalore. The company transfers the products from its
manufacturing plants to each of the four ware houses. Each warehouse cater to the demand of that
particular region for eg. Delhi warehouse will cater to the demands of northern region. The annual total
sales of all region put together is 1 lakh units. The average inventory of all units put together is 10000
units. The company want to increase the number of ware houses from 4 to 30 one in each state. The
products would be transferred from the plants to each of the 30 warehouses which will cater to the
demand of the particular states. What will happen to the sales and the inventory. Assume the product
availability is constant in both the cases.
.

Current

Proposed

Annual sales

100000

? Remain same as it depends on the product availability and not the

warehouse location

Warehouses

30

Average inventory

10000

Average inventory
days

36.5

Inventory
turnaround

10

Product availability

95%

95% (constant)

Inventory number of ware houses.

If the company increases the warehouses they may have to carry much higher levels of inventory
A company made the annual forecast for the year 2011-12 in the following manner. It made weekly
forecast for each of the 52 weeks in the year. It didnt make separate monthly or annual forecast. The
summation of every four weeks forecast became the monthly forecast and the summation of monthly
forecast became the annual forecast. The company measures the forecasting accuracy at the end of the
year. They found that the annual forecasting accuracy was 90%, monthly forecasting accuracy was 80%,
weekly accuracy was 65%. How is this possible because the company hadn't separately made the
monthly and the annual forecast.
Weeks

W1

W2

W3

W4

Forecast

100

100

100

100

Actual

68

129

72

141

Error=

32%

29%

38%

41%

What will happen to the transportation cost with the reduction in the number of warehouses.
Transportation cost is inversely related to the number of ware houses.
The decision to have more or less ware houses depends on two factors.
1.
The value of the item
2.
Nature of the demand
Value of the item
If the value of the item is high the company should have less number of warehouses as the focus
would be to reduce the inventory carrying cost and vice-versa.

The demand in each of the other regions is low. 0.5 truck loads per week and unpredictable. For
which region you will suggest a warehouse and for which region you wont
If the nature of demand is high, regular and predictable its better to have a ware house. If its low
and predictable then there is no point in having a warehouse in that particular location.

Tuesday, January 01, 2013

2:45 PM

WHAT will happen to the supply chain if the number of variants or the number of models increases?
A

Annual sales

1 Lakh units

1 lakh units

Number of variants

25

Inventory

Low

High

Increase in variety increases the supply chain complications which means higher inventories, higher
forecasting error higher stock outs and overall reduction in the supply chain performance.
Maruti currently manufactures 500 units of swift crank shaft before moving to SX4 crank shaft. Cost per
setup is Rs.1 lakh. They want to now produce 50 units per setup. What would be the cost implications.
Current scenario

Changed scenario

Setup cost

100000

100000

Units

500

50

Cost per unit

200

2000

If the batch quantity is increased from 500 to 5000 the unit cost will come down but the inventory will
go up.
Consider 2 companies C1 & C2. C1 produces 4 models m1-m4. the average sales per month for each
model is 500 units. Company 2 produces 10 models. M1-M10. the average sales per month for each
model is 200 units. The minimum batch quantity is 500 units for both the units . The companies
marketing department give the requirement to the production department. The production
department will start producing only of the quantity is more than the minimum batch quantity. What
would be the average inventory for each model of company 1 and company 2.
.

Company 1

Compnay 2

Models

M1-M4

M1-M10

Average sales

500/model

200/model

Average invenory

250

250

Average inventory days

30/500*250=15

30/200*250=37.5

500/30=16.6667

How can companies provide high variety to the market and at the same time have high levels of
operational efficiency?

If commonizations exist then

Batch size would increase and hence reduce the unit cost
Launch time for a new product would reduce.

Consider two companies Asian paints and nerolac. Following are the process details for nerolac.
Nerolac Paints

Process Steps

Duration

Procurement of 5 colors of raw material

1 Week

Mixing of 5 colors into 26 colors of paints

2 weeks

Transportation of paints to different warehouses across the country

1 week

Inventory of paints at the warehouses before sales

2 weeks

Asian Paints

Duration

Process Steps

Procurement of 5 colors of raw material

1 Week

Transportation of paints to different warehouses across the country

1 week

Inventory of paints at the warehouses before sales

4 weeks

Mixing of 5 colors into 26 colors of paints

2 weeks

Both companies manufacture 26 colors of paints from p1-p26 from 5 base colors. Each of them
forecasted a demand of 10 units for each color of paints. They had also procured the raw material
accordingly. But the actual demand turned out to be 20 units p1-p13 and zero units for p14-p26
1.
Draw the process of the two companies in the form of line graph. x-axis time in weeks, y-axis
number of variants.
2.
Calculate the sales, loss of sales and excess stock for both the companies.

Nerolac

Asian Paints

Postponement means keeping the number of variants low as long as possible and adding customization
as late as possible.

Communization and postponement are used together.

Wednesday, January 02, 2013

11:46 AM

IDU:- Implied demand uncertainty

Responsive supply chain

Efficient supply chain
Zone of strategic shift

An auto component supplier has two customer segments for his components.
1.
OEM
2.
After sales service
The supplier has got 4 OEM customers located in Delhi, Ahmedabad, Bangalore, and Pune. The supplier
also supplies to the after market. If the component fails in the field the supplier had to directly replace
it. Should the supplier has the same supply chain for both the segment or should the supply chain be
different. If its different then how.

OEM

ASS

Demand fluctuations

Low

High

Unpredictability

Low

High

No of delivery locations

Low

High

Time to respond to a customer order

High

Low

Lot size per order

High

Low

Variance

Low

High

Emergencies

Low

High

A business is said to have high IDU if the supply chain planning is difficult for that business.
The following could increase the IDU of a business.
Demand fluctuations

Unpredictability

Short time to respond to an order.

Higher variety

Sort product life cycles

Frequent emergencies

Responsive supply chain can manage the business with high implied demand uncertainties. i.e. they can
manage
Demand fluctuations

Unpredictability

Short time to respond to an order.

Higher variety

Sort product life cycles

Frequent emergencies

Efficient supply chain cant manage IDU business. They are efficient because of their low cost
High IDU business should have a responsive supply chain. Low IDU business should have an efficient
supply chain
How 7 Eleven configure different elements of supply chain effectively
How 7 Eleven manage to keep the inventory low

How they reduce the transportation and warehousing cost

How they manage their sourcing

Big Bazzar operates two distribution centers. One in Bombay another in Kolhapur. Bombay distribution
center caters to 40 stores. Kolhapur distributes to 5 stores. Hul will sell a minimum batch of 200
shampoos. The average sales per day per store is 5 units. Which of these 2 DC's can manage without
inventory?
7 elevens elements of supply chain

Combine distribution system

Market dominance strategy
Good information system
Local sourcing

In following scenarios 7 eleven type of supply chain doesnt work

Unpredictable demand fluctuation

If the local sourcing is not possible

If market dominance is not possible

If the suppliers are not dependable

If there are not many stores in one area then combine distribution system is not possible.

Monday, January 14, 2013

11:42 AM

3000 cases
100$ per case

By air
Transport Fair
Mode

Delivery Quantity
Time

Total Cost

Margin

Rail

7 days

1500*2.5=3750

1500*100*20%=30000 30000-

$2.5/case

1500

Profit

3750=2625
Truck

$6.00/Case

4 Days

Air

$10.35/Case 2 Days

1500+3000*3*5%=1950 1950*6=11700

1950*100*20%=39000 3900011700=273

1500+3000*5*5%=2250 2250*10.35=23287.5 2250*100*20%=45000 4500023257.5=21

So transport by Road (Truck) is the cheapest.

Week- 19970
1

17470

11316

26192

20263

100+.01*19970=299.7 100+.01*17470=274.7 100+.01*26192=361.92 100+.01*26192=361.92 100+.01*2026

Week- 39171
2
Day-1

2158

20633

23370

24100

Day-3

Day-5

Day-7

Week- 19970
1

17470+11316=28786

26192+20263=46455

8381+25377=33758

Cost

100+.01*28786=387.86 100+.01*46455=564.55 100+.01*33758=437.58

100+.01*19970=299.7

Week- 39171
2

2158+20633=22791

23370+24100=47470

100+.01*39171=491.71 100+.01*22791=327.91 100+.01*47470=574.7

100+.01*19970=299.7

100+.01*17470=274.7

120000*120=14400000 rupees
120000*10=1200000 kg
365/240=1.5208
4/1.5*500=1,333.3333 1,333.3333/4=333.3333
Golden carriers
120000/500=240
500*10*.08*240=96,000.0 cost of transportation
225*20%*120*4=21,600 inventory carrying cost
Total cost= 1600+21600=23200
Indian Railway
2000*10*.065*60=78000.0
1000*20%*120=24000

100+.01*26192=361.92

19603+18442=38045
100+.01*38045=480.45

Total cost = 1300+24000=25300

In real world companies have 3 components of inventory
Cycle inventory is the average

Safety inventory

In transit inventory = transit time in days/ 365 * annual demand

Total inventory = cycle inventory + safety inventory + in transit inventory

In case of Golden carriers
Cycle inventory = 250
Safety inventory = 657.53
Intransit inventory = 3/365*120000=986.3014
Total inventory= 250+657.53+986.30=1,893.83
Total inventory cost = 1893.83*120*20%=45451.92
Transportation cost = 500*10*.08*240=96,000.0
Total cost = 96000+45451.92=141451.92
In case of Indian Railways
Cycle inventory = 1000
Safety inventory = 6/365*120000*50%=986.3014
Intransit inventory = 5/365*120000=1643.8356
Total inventory= 1000+986.30+1643.83=3630.13
Total inventory cost = 3630.13*120*20%=87123.12
Transportation cost = 2000*10*.065*60=78000.0
Total cost = 87123.12+78000=165123.12
The daily average sales per day for a company is 100 units. But the range could be between 70-150 units
per day. The normal lead time for the purchases is 3 days. But the delay could be anywhere between 1-3
days. The companies cycle inventory takes care of the normal demand and the normal lead time. How
much safety inventory do you purpose to manage the demand and supply uncertainties.

The annual demand is 120000 the transit time is 3 days. The company is considering two scenarios.
Whether to order in a lot size of 120000 or in a lot size of 10000 units. Calculate the in transit inventory
without applying the formula.
120000*

=986.3014

10000*

*12=986.3014

Class Missed on 15-jan-2013

Wednesday, January 16, 2013
4:48 PM

Case Study: Problem-1

Wednesday, January 16, 2013
4:57 PM

Consider two warehouses Mumbai and Bangalore. Each warehouse receives 100 T/ day from the local
suppliers. Mumbai warehouse receives 100T through 20 consignments. Bangalore warehouse receives
100Tonnes through 200 Consignments. Each of them are planning to implement the milk run system.
They are looking at 3 options.
1.
A 10 T truck which can pick up 5 consignments a day, the cost is 1.5 Lakhs/month.
2.
A 5 Tonne truck which can pick up 5 consignments a day the cost is 1 Lakh/month.
3.
2.5 T truck which can pick up 5 consignments a day cost being 75000/month.
Which option is suitable for each of the warehouses.

4.
5.
6.

Options

Mumbai

Bangalore

2*1.5=3

2*1.5=3

4*1=4

.75*8=6.0

Logic to design the number of trucks in the Milk Run system.

Decide the number of trucks based only on weight
Decide the number of trucks based on the number of consignment
Choose the higher of the two options.
Options-1

Mumbai

Bangalore

Step-1: Based on Weight

10

10

Step-2: Based on Consignments

40

Step-3: Choose the higher of the two

10

40

Cost

10*1.5=15

40*1.5=60

If the lower is taken then 4 trucks would be chosen for Mumbai then only 40 Tons can be
delivered.
Options-2

Mumbai

Bangalore

Step-1: Based on Weight

20

20

Step-2: Based on Consignments

40

Step-3: Choose the higher of the two

20

40

Cost

20*1=20

40*1=40

Options-3

Mumbai

Bangalore

Step-1: Based on Weight

40

40

Step-2: Based on Consignments

40

Step-3: Choose the higher of the two

10

40

Cost

40*.75=30

40*.75=30

So option 1 is cheaper for Mumbai (15 Lakhs) and option 3 is cheaper for Bangalore(30 Lakhs)

Milk run system

Total number of warehouses

39

Monthly merchandise

950 tons

Local vendors

950*50%=475

450 Tons Through conventional @ 1.35/Kg

450*1000*1.35=607500

25 T through Express @ 4.5/Kg

25*1000*4.5=112500

Daily receipt at the warehouse

20 Ton

Number of Shipments

35/day

Local Suppliers

200

5% consignment/month

200*8%=16

3-5 Consignment/Month

200*20%=40

1-2 Consignments/Month

200*72%=144

Monthly rent for dedicated truck

4.5 Tons, 4000 KMs
5 consignments/day; 25 working days a month

50000

4000/125=32

Total cost now

607500+112500=720000

Rate per kg

720000/475000=1.5158

Step -1: By weight

20/4.5=5 trucks/day

Step-2: By consignment

35/5=7 trucks/day
7*50000=350000

Step-3: Take the higher of the both

So the cost

7*50000=350000

Carrying capacity

7*4.5*25=787.5

Capacity used

475 Tons= 475/787.5%=60.3175

Data to be collected for the milk run system.

1.
Number and location of the suppliers
2.
The weight received per day and the number of consignment received.
3.
The truck options possible for that city.

4.
5.

The cost of each truck

With the help of all these things we can easily implement the milk run system.

Problem-2
Packaging Costs

Real

Estimated

July-Nov

1.1

.5

Cartons & BOPP

70% 1.1*70%=0.77

Average number of cartoons

80000-120000 units

New Cartons

30000-40000 units

Cost/Carton

55

Cost for cartons

30000*55=1650000 to
40000*55=2200000

Recyclable plastic crates number of times

400

Cost of Recyclable plastic crates

500

Use of plastic crates/month

10

1 Recyclable Plastic Crate = 500

Cost of 1 cartoon = 55
Payback times = 500/55=9.0909
So in one month the money is recovered.
So 400-9.09=390.91 times the money is saved. = 390.91*55=21,500.05
Spending on Cartons

14 Crore/ 3 Years

Number of new Cartons

14 Crore/55 =2544000

Number of Cartons/month

2544000/36=70666.6667

1 Crate can replace 10 Cartons

70666/10=7066.6

Money saved on one Crate

21500

Total Money Saved

21500*7066.6=151931900

14/3=4.6667 4.6667/55=0.0848 0.0848 *10000000=848000.0 848000.0 *3=2544000

Pashu Khadya Company Limited

Monday, February 04, 2013
11:41 AM

For road the inventory norm at each warehouses which includes cycle inventory and factory inventory is
6 weeks. In case of rail rake it is 10 weeks and in case of rail wagons its 20 weeks.

Roads
Karads

Khakarvadi

Pune

Kalyan

Total

6 Weeks

6 Weeks

6 Weeks

6 Weeks

6 Weeks

Total cost
Inventory
Cycle inventory +
Safety inventory
Cycle inventory +
Safety inventory (Units)
In transit inventory (Units)
Total Inventory (Units)
Inventory Caring Cost
Ware House Space
Available
Additional Cost
Handling Cost
Inventory

Distribution
Warehouse and cross docking
Planning
Channels
Network design
Inventory storage

Inventory co-ordination
Creating a distribution center helps in reducing the number of transactions.
600*25=15,000
300*2=600

Tuesday, February 05, 2013

9:11 PM

Cross Docking is only used for inventory co-ordination

At the end of the day the inventory should be zero
1.
What are the benefits of cross docking?
2.
What are the challenges in implementing cross docking?
3.
For which type of products cross docking would be more suitable?

Assignment
Supply Chain improvement in an organization
You have to look at two companies that have undertaken any supply chain improvement initiative in the
recent past. This could be in the areas of transportation, inventory, forecasting etc.
Report should have 3 sections
1.
The supply chain problems faced by the company before the initiatives
2.
The description or explanation about the initiative
3.
The impact and benefit of the impact
Toyota
Wall mart
Dell

Calculate the monetary loss due to poor distribution

The price per cartel of chocolade is 1200
What should be done to improve the distribution performance of choco oil
What is the overall learning from this case

Current sales
Revenue
Profit
Impact of poor distribution
Stock outs
Loss units

Opportunity profit loss

Expires
No. of expires
Loss due to expires

Wednesday, February 06, 2013

11:43 AM

What are the reasons for this problem and what can be done to irradiate the problem?
If the product is of short self life and the forecasting is difficult then the company should follow a shorter
planning and replenishment process. This will improve the forecasting accuracy and would also rectify
the forecasting errors sooner than later.

What to find
Quantity to be shipped from one location to another.

Objective: To minimize the total cost (Fixed + Variable Costs)

Constraints:
All the demand of each location should be met.

No plant can supply more than its capacity

Plant can be open or closed

i=Plant location (i=1,2,3,..,n)

j=Demand location (i=1,2,3,..,m)
Xij = quantity to be shipped from plant location I to demand location j
Cij = cost per unit from plant I to market j
Fi = Fixed cost of plant i
Ki = Capacity of plant i

Constraints
Xij = Dj ( J=1,2,3,..m)
Xij:

Sunday, February 10, 2013

11:45 AM

Objective: To minimize the total cost (Fixed + Variable Costs)

Constraints:
All the demand of each location should be met.

=Dj(J=1,2,)

No plant can supply more than its capacity

=<Ki*Yi

Plant can be open or closed

Yi (0,1)

i=Plant location (i=1,2,3,..,n)

j=Demand location (i=1,2,3,..,m)
Xij = quantity to be shipped from plant location I to demand location j
Cij = cost per unit from plant I to market j
Fi = Fixed cost of plant i
Ki = Capacity of plant i

Constraints
Xij = Dj ( J=1,2,3,..m)
Xij:
Objective function
Min (FC+VC)

Demand Region:
Production &
Transportation
Cost per
1000000 Units
Supply
Region

N. America

S.
Europe
America

N.
America

81

92

S.
America

117

77

Asia

Africa

Fixed
Cost

Low
Capacity

Fixed
Cost

High
Capacity

101

130

115

6000

10

9000

20

108

98

100

4500

10

6750

20

Europe

102

105

95

119

111

6500

10

9750

20

Asia

115

125

90

59

74

4100

10

6150

20

Africa

142

100

103

105

71

4100

10

6000

20

Demand

12

14

16

Supply Region

N. America

S. America

Europe

Asia

Africa

Low Capacity High Capacity

( 1= Open,
(1= Open,
0= Close)
0= Close)

N. America

S. America

Europe

Asia

Africa

Demand

Monday, February 11, 2013

11:51 AM

Demand

Area

Revenue

Spot

Profit

Present
Values

Lease

Profit

Present
Values

Year-1

100000 100000 $
122,000

$
120,000

$
2,000

$
2,000

$
100,000

$
22,000

$
22,000

Year-2

100000 100000 $
122,000

$
120,000

$
2,000

$
1,818

$
100,000

$
22,000

$
20,000

Year-3

100000 100000 $
122,000

$
120,000

$
2,000

$
1,653

$
100,000

$
22,000

$
18,182

Net
Profit

$
5,471

Net
Profit

$
60,182

Year-0

100000

Year-2

50000

1.22

The company has 2 options.

To go for lease @1$/unit

To go for spot @ 1.2$/unit

Which is a better option

CASE STUDY:- Kalyan Pharma Limited (KPL)

Tuesday, February 12, 2013
12:03 PM

1.

Analyze the distribution network changes of KPL over the years.

Period

Distribution Structure

Impact

Pre 1972
1972-79
1979-87
1987-91
Post 1991
2.
3.

Whether the change of 1991 helped the company or didnt help the company
Should they continue with the current structure of KRP or should they make any
changes to the
structure?

PRE 1972

1972-1979
Consumers
Branches

Impact of removing a layer from the distribution network

Number of transactions will go up significantly

Distribution costs may go up
Inventory carrying costs may go up
Non value adding activities will increase

If KPL had not removed the sole selling agent could they have been in a better position in 1979 to
manage the raw material price increase

Refer to exhibit-6 and calculate the following

Account receivables
Inventory levels
Establishment costs in pre and post 1991
.

Pre 1991

Post 1991

A/R

70-90

Inventory

40-55

20-22

Establishment Cost

600

200

They should retain the KRDs. The distributers should be services directly from the factories. KRDs are
required only for servicing the institutional buyers.

Wednesday, February 13, 2013

5:08 PM

Consider the interest rata was 15% per annum in 1990-91 and 24% per annum in 1992-93. what would
have been the increase in the inventory carrying cost in terms of percentage.
Sales per month

314

480

Average inventory

652

1190

Inventory carrying cost

652*.15=97.8

1190*.24=285.6

If LTCL's annual net profit was 3% in 1990-91 what would be its net profit in 1992-93. assume all costs
other than the inventory carrying cost were in the same proportion between 1991 and 1993
1990-91
Annual sales = 314*12=3,768
Net Profit @ 3% :- 3768*3%=113.04
Total Cost :- 3768-113.04=3654.96
Other costs (except ICC) = 3654.96-97.8=3557.16
1991-92
Cost Proportion 480/314*3557.16=5437.6968
Annual sales 480*12=5,760
Profit :- 5760-5437-285.6=37.4
Profit percentage:- 37.4/5760*100=0.6493
What would be the overall reduction in the inventory if LTCL reduced the inventory of remaining 150
articles by 50%
Calculate the lead time for the regions in two scenarios
1.
The inventory as a plant is kept as raw cotton
It will take 45-50 days for the inventory to get cleared up
2.
The inventory as the plant is kept as grey thread
It will take 10-15 days for the inventory to get cleared up
Steps to be taken to reduce the cost and improve profit and efficiency.
1.

Give grey thread inventory instead of raw cotton.

2.
3.
4.
5.
6.
7.

Reduce the idle time between regions placing the order and then plants starting the production.
Shorten the planning cycle from one month to 15 days.
Reduce the number of warehouses.
Inter ware house transfers.
Combined transportation.
Improve forecasting accuracy.