Alko Inc.

GROUP 14

ANKIT MITTAL 1402016

ARPIT SINGH 1402025

DIPRONIL MONDAL 1402052

DIVYANSHU JOIYA 1402054

Present Status of Alko Inc.

Holding cost, H = $ 0.15 per unit and dayTL costs from plants to DCs = $ 0.09 per unitLTL costs from DC to customers = $ 0.10 per unitTL costs from plants to central whse. = $ 0.05 per unitLTL cost from central whse. to cust. = $ 0.24 per unitReorder Interval, T = 6 daysLead Time, L = 5 days

Target cycle service level, CSL = 0.95

Costs involved in distribution channel

• Alko Inc. is a leading manufacturer of lighting fixtures having three

manufacturing units in Cleveland.

• Its sales has divided US in five regions and has DC in each region.

• Past few years, the profit margin is shrinking as competition intensified.

• Company decides to restructure distribution system to achieve effective and

responsive supply chain.

Decision Constraints

 Type of ProductNo. of parts Region 1 Region 2 Region 3 Region 4 Region 5

Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36Part 1 SD   6.98 6.48 5.26 3.48 4.49Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49Part 3 SD   3.16 6.20 6.39 6.76 3.56Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54Part 7 SD   1.98 1.42 2.39 3.76 3.98

Part 1- High demandPart 2- Medium demandPart 3- Low demand

• Options available:Build a national distribution center and close all 5 DC’s

Build a national distribution and keep some DC’s open

• Cost of transportation changes but lead time remains same.• Heavy investments for NDC and closing DC recovers $50,000.

Customers daily demand

Demand and Safety stocks

  Region 1 Region 2 Region 3 Region 4 Region 5All

RegionsPart 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 14.89Part 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 11.81Part 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

Demand during reorder interval and replenishment lead time

  Region 1 Region 2 Region 3 Region 4 Region 5All Regions

Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81

Cycle stock and required safety stock by part and region

Local DCs vs NDC

 No of parts Region 1 Region 2

Region 3 Region 4 Region 5

All Regions Central

Part 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $2,92,107 $2,82,208

Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $2,79,213 $2,15,356

Part 7 70 $49,246 $41,626 $63,051$1,10,336 $1,24,747 $3,89,005 $2,57,600

All Parts 1,83,439 1,70,2231,86,92

0 2,17,479 2,02,266 9,60,326 7,55,164

Savings

Part 1 $9,899

Part 3 $63,857

Part 3 $1,31,405

Total $ 2,05,162

Total Annual Inventory and Distribution Cost for local DCs and NDC

Option 1:Part 1 is decentralized with all others centralized

  Region 1 Region 2 Region 3 Region 4 Region 5 CentralInventory 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         $ 0.84 $ 0.68 Transportation cost         $ 0.19 $ 0.29

Total cost part 3   $ 1.03 $ 0.97 Inventory cost           $ 1.26 Transportation cost           $ 0.29 Total cost part 7           $ 1.55

Costs per unit by region and part

  No of parts Region 1 Region 2 Region 3 Region 4 Region 5 CentralPart 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0Part 3 20           $2,15,356Part 7 70           $2,57,600

All Parts $1,03,729 $72,171 $56,964 $37,982 $21,260 $4,72,956Total

system: $7,65,064

Total Annual Inventory and Distribution Cost

Savings = 960326-765064= $ 195,262

Option 2:Part 1 is decentralized with all others centralized except part3 in region 5

    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           $ 0.84 $ 0.68 Transportation cost           $ 0.19 $ 0.29

Total cost part 3     $ 1.03 $ 0.97 Inventory cost             $ 1.26 Transportation cost             $ 0.29 Total cost part 7             $ 1.55

Costs per unit by region and part

  No of parts Region 1 Region 2 Region 3 Region 4 Region 5 CentralPart 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0Part 3 20         $56,259 $1,87,566Part 7 70           $2,57,600

All Parts $1,03,729 $72,171 $56,964 $37,982 $77,519 $4,45,166Total

system: $7,93,533

Total Annual Inventory and Distribution Cost

Savings = 960326-793533= $ 166,793

Option 3:Part 1,3 is decentralized with part 7 centralized

    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

Costs per unit by region and part

  No of parts Region 1 Region 2 Region 3 Region 4 Region 5 CentralPart 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $0Part 7 70           $2,57,600

All Parts $1,34,192 $1,28,597 $1,23,869 $1,07,143 $77,519 $2,57,600Total

system: $8,28,921

Total Annual Inventory and Distribution Cost

Savings = 960326-828921= $ 131,405

Option 4:Region 5 served from region 4

    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

Costs per unit by region and part

  No of parts Region 1 Region 2 Region 3 Region 4 Region 5 CentralPart 1 10 $1,03,729 $72,171 $56,964 $45,892 $0 Part 3 20           $2,15,356Part 7 70           $2,57,600

All Parts $1,03,729 $72,171 $56,964 $45,892 $0 $4,72,956Total

system: $7,51,714

Total Annual Inventory and Distribution Cost

Savings = 960326-751714= $ 208,612

Option 5:Part 3 served from all DCs and NDC, part 1 form all regions except Region 5, and part 7 from NDC.

    Region 1 Region 2 Region 3 Region 4 Region 5 Central

Inventory cost   $ 0.64 $ 0.68 $ 0.69 $ 0.69    

Transportation cost   $ 0.19 $ 0.19 $ 0.19 $ 0.19    

Total cost part 1   $ 0.83 $ 0.87 $ 0.88 $ 0.88  Inventory cost   $ 0.45 $ 0.45 $ 0.45 $ 0.45 $ 0.45 $ 0.38 Transportation cost   $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.29 Total cost part 3   $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.67 Inventory cost             $ 1.26 Transportation cost             $ 0.29 Total cost part 7             $ 1.55

Costs per unit by region and part

  # of parts Region 1 Region 2 Region 3 Region 4 Region 5 CentralPart 1 10 $1,07,670 $72,171 $56,964 $37,982   Part 3 20 $11,587 $19,389 $28,733 $28,780 $34,993 $81,468Part 7 70           $2,57,600

All Parts $1,19,257 $91,560 $85,697 $66,762 $34,993 $3,39,068Total

system: $7,37,337

Total Annual Inventory and Distribution Cost

Savings = 960326-737337= $ 222,988

Summary

Option Investment Annual CostSavings from Base Case

Rate of return NPV(10%)

Decentralize all parts in five warehouses Base Case $ 9,60,326      

Centralize all parts at NDC $ 8,50,000 $ 7,55,164 $ 2,05,162 24.1% $14,06,777

Centralize parts 3, 7, decentralize part 1 $ 6,50,000 $ 7,65,064 $ 1,95,262 30.0%

$14,97,884

Centralize part 7, decentralize part3 1, 3 $ 3,00,000 $ 8,28,921 $ 1,31,405 43.8%

$11,45,453

Serve region 5 part 1 from region 4 $ 6,00,000 $ 7,51,714 $ 2,08,612 34.8% $16,94,734

Centralize part 7, Part 3 served from all DCs and NDC, part 1 form all regions except Region 5 $ 8,50,000 $ 7,37,337 $ 2,22,988 26.2%

$16,02,868

Lesson Learnt

The value of centralization of inventory is affected by the coefficient

of variation as well as the correlation of demand. High coefficient of

variation products with low correlation provide the biggest gains

from centralization while low coefficient of variation products with

high correlations provide the least value from centralization.

THANK YOU