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Case Study: ALKO

Inputs
Holding cost, H = $ 0.15 per unit and day
TL costs from plants to DCs = $ 0.09 per unit
LTL costs from DC to customers = $ 0.10 per unit
TL costs from plants to central whse. = $ 0.05 per unit
LTL cost from central whse. to cust. = $ 0.24 per unit
Reorder Interval, T = 6 days
Lead Time, L = 5 days
Target cycle service level, CSL = 0.95
Correlation Coefficient = 0

Demand data by part and region


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean, R 10 35.48 22.61 17.66 11.81 3.36 90.92 daily demand 1892.1
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA annual demand 690617
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of variation by part and region


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 0.20 0.29 0.30 0.29 1.34 NA
Part 3 1.27 1.49 1.04 1.10 0.48 NA
Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during reorder interval and replenishment lead time


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 390.28 248.71 194.26 129.91 36.96 1000.12
Part 1 SD 23.15 21.49 17.45 11.54 14.89 NA
Part 3 Mean 27.28 45.65 67.65 67.76 82.39 290.73
Part 3 SD 10.48 20.56 21.19 22.42 11.81 NA
Part 7 Mean 5.28 8.03 8.80 21.34 27.94 71.39
Part 7 SD 6.57 4.71 7.93 12.47 13.20 NA

Outputs
Cycle stock and required safety stock by part and region Cycle stock and required safety stock by part and region in days of demand
Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76 Part 1Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00
Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60 Part 1 SS 1.07 1.56 1.62 1.61 7.29 1.60
Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29 Part 3 Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00
Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22 Part 3 SS 6.95 8.15 5.67 5.99 2.59 5.38
Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47 Part 7 Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00
Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81 Part 7 SS 22.50 10.61 16.30 10.57 8.55 11.37

Costs per unit by region and part


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.69 $ 1.54 $ 0.69
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 0.88 $ 1.73 $ 0.88
Inventory cost $ 1.49 $ 1.67 $ 1.30 $ 1.35 $ 0.84 $ 1.26
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 3 $ 1.68 $ 1.86 $ 1.49 $ 1.54 $ 1.03 $ 1.45
Inventory cost $ 3.83 $ 2.04 $ 2.89 $ 2.04 $ 1.73 $ 2.16
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 7 $ 4.02 $ 2.23 $ 3.08 $ 2.23 $ 1.92 $ 2.35

Total Annual Inventory and Distribution Cost


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $292,107
Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $279,213
Part 7 70 $49,246 $41,626 $63,051 $110,336 $124,747 $389,005
All Parts $183,439 $170,223 $186,920 $217,479 $202,266 $960,326

CR - 09/18/2017 15:10:24 Page 1 366233187.xlsx - Demand & Costs


Case Study: ALKO

Inputs
Holding cost, H = $ 0.15 per unit and day
TL costs from plants to DCs = $ 0.09 per unit
LTL costs from DC to customers = $ 0.10 per unit
TL costs from plants to central whse. = $ 0.05 per unit
LTL cost from central whse. to cust. = $ 0.24 per unit
Reorder Interval, T = 6.00 days
Lead Time, L = 5.00 days
Target cycle service level, CSL = 0.95
Correlation Coefficient = -

Demand data by part and region


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92 90.91
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA 12.27
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA 12.15
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA 6.45

Demand during reorder interval and replenishment lead time


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1 Mean 390.28 248.71 194.26 129.91 36.96 1000.12 1000.01
Part 1 SD 23.15 21.49 17.45 11.54 14.89 NA 40.71
Part 3 Mean 27.28 45.65 67.65 67.76 82.39 290.73 290.73
Part 3 SD 10.48 20.56 21.19 22.42 11.81 NA 40.30
Part 7 Mean 5.28 8.03 8.80 21.34 27.94 71.39 71.39
Part 7 SD 6.57 4.71 7.93 12.47 13.20 NA 21.40

Outputs
Cycle stock and required safety stock by part and region
Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76 272.73
Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60 66.96
Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29 79.29
Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22 66.28
Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47 19.47
Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81 35.20

Costs per unit by region and part


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.69 $ 1.54 $ 0.69 $ 0.56
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.29
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 0.88 $ 1.73 $ 0.88 $ 0.85
Inventory cost $ 1.49 $ 1.67 $ 1.30 $ 1.35 $ 0.84 $ 1.26 $ 0.83
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.29
Total cost part 3 $ 1.68 $ 1.86 $ 1.49 $ 1.54 $ 1.03 $ 1.45 $ 1.12
Inventory cost $ 3.83 $ 2.04 $ 2.89 $ 2.04 $ 1.73 $ 2.16 $ 1.26
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.29
Total cost part 7 $ 4.02 $ 2.23 $ 3.08 $ 2.23 $ 1.92 $ 2.35 $ 1.55

Total Annual Inventory and Distribution Cost


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central Savings
Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $292,107 $282,208 $9,899
Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $279,213 $215,356 $63,857
Part 7 70 $49,246 $41,626 $63,051 $110,336 $124,747 $389,005 $257,600 $131,405
All Parts $183,439 $170,223 $186,920 $217,479 $202,266 $960,326 $755,164
Savings: $205,162

Cost Savings from Centralization as a function of the correlation coefficient and target cycle service level

All parts Correlation Cofficiant


$205,162 0.00 0.25 0.50 0.75 1.00
0.9
0.91
Target Cycle Service Level

0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

Type 1 only Correlation Cofficient


$9,899 0.00 0.25 0.50 0.75 1.00
0.9
Target Cycle Service Level

0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

Type 3 only Correlation Cofficient


$63,857 0.00 0.25 0.50 0.75 1.00
0.9
Target Cycle Service Level

0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

Type 7 only Correlation Cofficient


$131,405 0.00 0.25 0.50 0.75 1.00
0.9
Target Cycle Service Level

0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

CR - 09/18/2017 15:10:24 Page 2 366233187.xlsx - Central vs. Local


Case Study: ALKO (Part 1 is decentralized with all others centralized)

Inputs
Holding cost = $ 0.15 per unit and day daily demand at NDC 982.9
TL costs from plants to DCs = $ 0.09 per unit annual demand at NDC 358758.5
LTL costs from DC to customers = $ 0.10 per unit
TL costs from plants to central whse. = $ 0.05 per unit
LTL cost from central whse. to cust. = $ 0.24 per unit
Reorder Interval = 6 days
Lead Time = 5 days
Target cycle service level = 0.95
Correlation Coefficient = 0

Demand data by part and region


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of variation by part and region


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 0.20 0.29 0.30 0.29 1.34 NA
Part 3 1.27 1.49 1.04 1.10 0.48 NA
Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during reorder interval and replenishment lead time


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 Mean 390.28 248.71 194.26 129.91 36.96
Part 1 SD 23.15 21.49 17.45 11.54 14.89
Part 3 Mean 290.73
Part 3 SD 40.30
Part 7 Mean 71.39
Part 7 SD 21.40

Outputs
Cycle stock and required safety stock by part and region
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1Cycle Stock 106.44 67.83 52.98 35.43 10.08
Part 1 SS 38.08 35.35 28.70 18.98 24.49
Part 3 Cycle Stock 79.29
Part 3 SS 66.28
Part 7 Cycle Stock 19.47
Part 7 SS 35.20

Costs per unit by region and part


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.69 $ 1.54
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 0.88 $ 1.73
Inventory cost $ 0.83
Transportation cost $ 0.29
Total cost part 3 $ 1.12
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55

Total Annual Inventory and Distribution Cost


# of part Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $0 $292,107
Part 3 20 $215,356
Part 7 70 $257,600
All Parts $103,729 $72,171 $56,964 $37,982 $21,260 $472,956
Total logistic system: $765,064
Costs Savings
Benchmark: All parts in the field: $960,326 $195,262
All parts centralized: $755,164 -$9,899

Correlation Cofficient
$765,064 0.00 0.25 0.50 0.75 1.00
0.9
Target Cycle Service Level

0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

CR - 09/18/2017 15:10:24 Page 3 366233187.xlsx - option1.0


Case Study: ALKO (Part 1,3 is decentralized with part 7 centralized)

Inputs
Holding cost, H = $ 0.15 per unit and day
TL costs from plants to DCs = $ 0.09 per unit daily demand at NDC 454.3
LTL costs from DC to customers = $ 0.10 per unit annual demand at NDC 165819.5
TL costs from plants to central whse. = $ 0.05 per unit
LTL cost from central whse. to cust. = $ 0.24 per unit
Reorder Interval, T = 6 days
Lead Time, L = 5 days
Target cycle service level, CSL = 0.95
Correlation Coefficient = 0

Demand data by part and region


# of part Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of variation by part and region


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 0.20 0.29 0.30 0.29 1.34 NA
Part 3 1.27 1.49 1.04 1.10 0.48 NA
Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during reorder interval and replenishment lead time


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 Mean 390.28 248.71 194.26 129.91 36.96
Part 1 SD 23.15 21.49 17.45 11.54 14.89
Part 3 Mean 27.28 45.65 67.65 67.76 82.39
Part 3 SD 10.48 20.56 21.19 22.42 11.81
Part 7 Mean 71.39
Part 7 SD 21.40

Outputs
Cycle stock and required safety stock by part and region
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1Batch Stock 106.44 67.83 52.98 35.43 10.08
Part 1 SS 38.08 35.35 28.70 18.98 24.49
Part 3 Batch Stock 7.44 12.45 18.45 18.48 22.47
Part 3 SS 17.24 33.82 34.86 36.88 19.42
Part 7 Batch Stock 19.47
Part 7 SS 35.20

Costs per unit by region and part


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.69 $ 1.54
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 0.88 $ 1.73
Inventory cost $ 1.49 $ 1.67 $ 1.30 $ 1.35 $ 0.84
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 3 $ 1.68 $ 1.86 $ 1.49 $ 1.54 $ 1.03
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55

Total Annual Inventory and Distribution Cost


# of part Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $0
Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $0 $279,213
Part 7 70 $257,600
All Parts $134,192 $128,597 $123,869 $107,143 $77,519 $257,600
Total logistic system: $828,921
Costs Savings
Benchmark: All parts in the field: $960,326 $131,405
All parts centralized: $755,164 -$73,757

Correlation Cofficient
$828,921 0.00 0.25 0.50 0.75 1.00
0.9
Target Cycle Service Level

0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99

CR - 09/18/2017 15:10:24 Page 4 366233187.xlsx - option1.0a


Case Study: ALKO (region 5 served from region 4)

Inputs
Holding cost, H = $ 0.15 per unit and day
TL costs from plants to DCs = $ 0.09 per unit
LTL costs from DC to customers = $ 0.10 per unit
TL costs from plants to central whse. = $ 0.05 per unit
LTL cost from central whse. to cust. = $ 0.24 per unit
Reorder Interval, T = 6 days
Lead Time, L = 5 days
Target cycle service level, CSL = 0.95
Correlation Coefficient = 0

Demand data by part and region


# of partsRegion 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of variation by part and region


Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 0.20 0.29 0.30 0.29 1.34 NA
Part 3 1.27 1.49 1.04 1.10 0.48 NA
Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during reorder interval and replenishment lead time


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 Mean 390.28 248.71 194.26 166.87 50
Part 1 SD 23.15 21.49 17.45 18.84
Part 3 Mean 290.73
Part 3 SD 40.30
Part 7 Mean 71.39
Part 7 SD 21.40

Outputs
Cycle stock and required safety stock by part and region
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1Batch Stock 106.44 67.83 52.98 35.43
Part 1 SS 38.08 35.35 28.70 30.99
Part 3 Batch Stock 79.29
Part 3 SS 66.28
Part 7 Batch Stock 19.47
Part 7 SS 35.20

Costs per unit by region and part


Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.84
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.22
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 1.06
Inventory cost $ 0.83
Transportation cost $ 0.29
Total cost part 3 $ 1.12
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55

Total Annual Inventory and Distribution Cost


# of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $103,729 $72,171 $56,964 $45,892 $0
Part 3 20 $215,356
Part 7 70 $257,600
All Parts $103,729 $72,171 $56,964 $45,892 $0 $472,956
Total logistic system: $751,714
Costs Savings
Benchmark: All parts in the field: $960,326 $208,612
All parts centralized: $755,164 $3,451

CR - 09/18/2017 15:10:25 Page 5 366233187.xlsx - Option 2


Summary of investment and annual cost for various options

Option Investment Annual Cost


Decentralize all parts in five warehouses Base Case $ 960,326
Centralize all parts at NDC $ 850,000 $ 755,164
Centralize parts 3, 7, decentralize part 1 $ 650,000 $ 765,064
Centralize part 7, decentralize parts 1, 3 $ 300,000 $ 828,921
Centralize parts 3, 7, decentralize part 1
serve region 5 part 1 from region 4 $ 600,000 $ 751,714
Savings from Base Case Rate of return

$ 205,162 24.1%
$ 195,262 30.0%
$ 131,405 43.8%

$ 208,612 34.8%