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Inventory Management And Risk Pooling Essay

2739 words - 11 pages

Question 17: Chapter 2 Inventory Management and Risk Pooling
KLF Electronics is an American manufacturer of electronic equipment. The company has a single manufacturing facility in San Jose, California. KLF Electronics distributes its products through five regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles. In the current distribution system, the United States is partitioned into five major markets, each of which is served by a single regional warehouse. Customers, typically retail outlets, receive items directly from the regional warehouse in their market. That is, in the current distribution system, each customer is assigned to a single market and receives ...view middle of the document...

To perform a rigorous analysis, you have identified a typical product, Product A. Table 2-11 provides historical data and includes weekly demand for this product for the last 12 weeks in each of the market areas. An order (placed by a warehouse to the factory) costs $5,550 (per order), and holding inventory costs $1.25 per unit per week. In the current distribution system, the cost of transporting a product from the manufacturing facility to a warehouse is given in Table 2-12 (see the column “Inbound”). Table 2-12 also provides information about transportation cost per unit from each warehouse to the stores in its market area (see the column “Outbound”). Finally, Table 2-13 provides information about transportation costs per unit product from each existing regional warehouse to all other market areas, assuming this regional warehouse becomes the central warehouse. Suppose you are to compare the two systems for Product A only; what is your recommendation? To answer this question, you should compare costs and average inventory levels for the two strategies assuming demands occur according to the historical data. Also, you should determine which regional warehouse will be used as the centralized warehouse.

Issue 3: c. It is proposed that in the centralized distribution strategy, that is, the one with a single warehouse, products will be distributed using UPS Ground Service, which guarantees that products will arrive at the warehouse in three days (0.5 week). Of course, in this case, transportation cost for shipping a unit product from a manufacturing facility to the warehouse increases. In fact, in this case, transportation costs increase by 50%. Thus, for instance, shipping one unit from the manufacturing facility to Atlanta will cost $18.Would you recommend using this strategy? Explain your answer.

Answer (a) In this case, the demands from all warehouses are positively correlated. Therefore the benefits derived from proposed system would not be considerable and new centralized system wouldn’t be attractive.

Part 2
Table 1: Historical Data Week Atlanta Boston Chicago Dallas LA Total 1 33 26 44 27 32 162 2 45 35 34 42 43 199 3 37 41 22 35 54 189 4 38 40 55 40 40 213 5 55 46 48 51 46 246 6 30 48 72 64 74 288 7 18 55 62 70 40 245 8 58 18 28 65 35 204 9 47 62 27 55 45 236 10 37 44 95 43 38 257 11 23 30 35 38 48 174 12 55 45 45 47 56 248

Table 2: Current transportation costs per unit Warehouse Inbound Outbound Atlanta 12 13 Boston 11.5 13 Chicago 11 13 Dallas 9 13 LA 7 13 Table 3: Transportation costs per unit in centralized system Warehouse Atlanta Boston Chicago Dallas Atlanta 13 14 14 15 Boston Chicago Dallas LA 14 14 15 17 13 22 15 17 22 13 15 16 15 15 13 22

LA 17 17 16 22 13 Service Level 90% and lead time 2 weeks

Atlanta Boston Chicago Dallas LA

Avg. Demand 39.7 40.8 47.3 48.1 45.9

STD 12.8 12.2 21.2 13.2 11.3

CV 0.32 0.30 0.45 0.27 0.25

Q 590.8 599.4 644.8 650.5 635.7

Inbound per Unit 12 11.5 11 9 7

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