Answers 1.

The annual inventory and distribution cost of the current distribution system (Option 1) is: $1,063,918.19 USD.

OPTION 1: Current distribution system (stock each item at every DC). ANNUAL COST (Inventory + distribution) of current system with all H/M/L products at DC#. DC 1 DC2 DC 3 DC 4 DC 5 TOTAL $ 123,154.52 $ 84,550.47 $ 66,633.24 $ 44,448.24 $ 23,099.34 $ 341,885.80 $ 33,178.80 $ 51,085.76 $ 60,969.50 $ 44,423.59 $ 73,638.49 $ 66,116.95 $ 75,906.40 $ 117,770.79 $ 64,460.92 $ 134,481.18 $ 308,154.13 $ 413,878.26

High Medium Low

TOTAL ANNUAL COST OF CURRENT SYSTEM $ 1,063,918.19

2.-

We would recommend setting up an NDC because doing so can bring significant savings to the company in the However, closing all regional DCs and handling all products at an NDC (Option 2) is not the best option.
=0 =0.5 =1 $ 858,783.67 $ 949,123.92 $ 1,019,790.02 $ 1,063,918.19

TOTAL ANNUAL COST OF OPTION 2 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM

OPTION 2: Build a National Distribution Center (NDC) and close 5 regional DCs. 1892.1 690,616.50 | V $ 1,300,000.00 $ 250,000.00 $ 1,050,000.00 Products handled at NDC/day. Annual savings Products handled at NDC/year. $ 205,134.53 USD in best-case scenario. $ 114,794.27 USD in middle-case scenario. $ 44,128.17 USD in worst-case scenario. Cost of NDC construction Time to recover investment. Money recovered from DCs. 5.118592234 Years in best-case scenario. Initial investment required 9.14679808 Years in middle-case scenario. 23.79432481 Years in worst-case scenario.

690,616.50 | V $ 1,300,000.00 $ 250,000.00 $ 1,050,000.00

Products handled at NDC/year.

Cost of NDC construction Money recovered from DCs. Initial investment required

$ 205,134.53 USD in best-case scenario. $ 114,794.27 USD in middle-case scenario. $ 44,128.17 USD in worst-case scenario. Time to recover investment. 5.118592234 Years in best-case scenario. 9.14679808 Years in middle-case scenario. 23.79432481 Years in worst-case scenario. worst-case scenario: =1

best-case scenario: =0

middle-case scenario: =0.5

3.-

If an NDC is built while keeping all regional DCs open, there are 2 more options:
=0 =0.5 =1 $ 868,656.00 $ 944,698.30 $ 1,004,278.26 $ 1,063,918.19

TOTAL ANNUAL COST OF OPTION 3 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM

OPTION 3: Handle High products at regional DCs and build NDC for Middle and Low products. 982.9 358,758.50 | V $ 800,000.00 $ $ 800,000.00 Products handled at NDC/day. Annual savings Products handled at NDC/year. $ 195,262.20 USD in best-case scenario. $ 119,219.89 USD in middle-case scenario. $ 59,639.93 USD in worst-case scenario. Cost of NDC construction Time to recover investment. Money recovered from DCs. 4.097055194 Years in best-case scenario. Initial investment required 6.710289682 Years in middle-case scenario. 13.41383215 Years in worst-case scenario. middle-case scenario: =0.5 worst-case scenario: =1

best-case scenario: =0

Our recommendation would be option 3: To handle High demand products at regional DCs and build an NDC for Middle an Becasue: Option 4 requires the lowest initial investment and its recovery time is also the lowest. However, in the long te In both best and worst-case scenarios, annual savings are higher for option 3 than for option 4.

In the best-case scenario, annual savings are slightly higher for option 2 than for option 3. However, in middle a The required initial investment and its recovery time are much higher for option 2 than for option 3.

(Option 1) is: $1,063,918.19 USD.

at DC#.

C5 TOTAL $ 23,099.34 $ 341,885.80 $ 308,154.13 $ 413,878.26

$ 64,460.92

$ 134,481.18

RRENT SYSTEM $ 1,063,918.19

nt savings to the company in the long term. 2) is not the best option.

1,019,790.02

cenario. e scenario. scenario.

scenario. se scenario. e scenario.

cenario. e scenario. scenario.

scenario. se scenario. e scenario.

o: =1

1 1,004,278.26

TOTAL ANNUAL COST OF OPTION 4 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM

=0 =0.5 =1 $ 932,513.34 $ 981,066.00 $ 1,019,224.77 $ 1,063,918.19

products.

OPTION 4: Handle High and Middle products at regional DCs and build NDC for Low products. 454.3 165,819.50 | V $ 400,000.00 $ $ 400,000.00 Products handled at NDC/day. Annual savings Products handled at NDC/year. $ 131,404.86 USD in best-case scenario. $ 82,852.19 USD in middle-case scenario. $ 44,693.42 USD in worst-case scenario. Cost of NDC construction Time to recover investment. Money recovered from DCs. 3.044027533 Years in best-case scenario. Initial investment required 4.827874885 Years in middle-case scenario. 8.94986342 Years in worst-case scenario. middle-case scenario: =0.5 worst-case scenario: =1

cenario. e scenario. scenario.

scenario. se scenario. e scenario.

o: =1

best-case scenario: =0

s and build an NDC for Middle and Low demand products.

he lowest. However, in the long term after investment recovery, option 3 implies higher annual savings. than for option 4.

for option 3. However, in middle and worst-case scenarios, annual savings are higher for option 3. on 2 than for option 3.

0.5 =1 981,066.00 $ 1,019,224.77

ild NDC for Low products.

D in best-case scenario. D in middle-case scenario. D in worst-case scenario. vestment. ars in best-case scenario. ars in middle-case scenario. ars in worst-case scenario.

orst-case scenario: =1

ALKO case study OPTION 1: Current distribution system (stock each item at every DC). Daily Demand for 1 product DC 1 DC 2 Mean 35.48 S. D. 6.98 Mean 2.48 S. D. 3.16 Mean 0.48 S. D. 1.98

Part 1 Part 3 Part 7

100 Products 10 High 20 Medium 70 Low

DC 3 22.61 6.48 4.15 6.2 0.73 1.42 17.66 5.26 6.15 6.39 0.8 2.39

OPTION 1: Current distribution system (stock each item at every DC). ANNUAL COST (Inventory + distribution) of current system with all H/M/L products at DC#. DC 1 DC2 DC 3 DC 4 DC 5 $ 123,154.52 $ 84,550.47 $ 66,633.24 $ 44,448.24 $ 23,099.34 $ 33,178.80 $ 60,969.50 $ 73,638.49 $ 75,906.40 $ 64,460.92 $ 51,085.76 $ 44,423.59 $ 66,116.95 $ 117,770.79 $ 134,481.18 TOTAL ANNUAL COST OF CURRENT SYSTEM

High Medium Low

TC =

(Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Transportation cost from plant to (Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((L

DC 4 11.81 3.48 6.16 6.76 1.94 3.76

DC 5 3.36 4.49 7.49 3.56 2.54 3.98

Total

Periodic review policy = OUL Transport $/u Current NDC Plant to DC TL 0.09 0.05 DC to cust. LTL 0.1 0.24 L+R 11 Holding $/(u*day) R=T 6 L 5 days ----> 0.15 (transit or storage)

CSL z= TOTAL $ 341,885.80 $ $ 308,154.13 413,878.26

95% 1.6448536

$ 1,063,918.19

transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer) ays in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

1.- Total annual cost (inventory + distribution) of current system ANNUAL COST (Inventory + distribution) of current system with 1 high product at DC1 TC = (Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Trans (Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in transit))+ Avg Inv = Q/2 + SS 4 days in production 1 days in transit (transit or storage) OUL =

Total units transported in a year = (lot size)*(# o

428.3584 (l+r) = 23.15004 (l+r) = 390.28 Q = *R SS = 38.07843 212.88 in OUL This estimated Q can be used in OUL when its val TC = (Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Tra TC =

12315.45 ANNUAL COST (Inventory + distribution) of current system with 1 high pr * 10 high products = 123154.5 ANNUAL COST (Inventory + distribution) of curren

t system with 1 high product at DC1 +(Holding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer) nsported in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

al units transported in a year = (lot size)*(# of orders in a year) = Q*(365/R)

s estimated Q can be used in OUL when its value is not provided. age)+(Holding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to Customer)

+ distribution) of current system with 1 high product at DC1

NUAL COST (Inventory + distribution) of current system with 10 high products at DC1

om DC to Customer)

ALKO case study OPTION 2: Build a National Distribution Center (NDC) and close 5 regional DCs.

100 Products Part 1 Part 3 Part 7 10 High 20 Medium 70 Low

Daily Demand for 1 product DC 1 DC 2 Mean 35.48 S. D. 6.98 Mean 2.48 S. D. 3.16 Mean 0.48 S. D. 1.98

DC 3 22.61 6.48 4.15 6.2 0.73 1.42 17.66 5.26 6.15 6.39 0.8 2.39

NDC Aggregation 100 Products 10 High 20 Medium 70 Low

Daily Demand for 1 product S. D. =0 S. D. =0.5 Mean 90.92 12.27391136 17.06094077 26.43 12.15026337 16.75210136 6.49 6.451891196 8.774132436

ANNUAL COST (Inventory + distribution) of aggregated system with all H/M/L products at NDC for possible values. =0 =0.5 =1 High $ 332,013.47 $ 346,311.42 $ 357,397.56 Medium $ 244,296.79 $ 271,786.43 $ 293,207.62 Low $ 282,473.41 $ 331,026.07 $ 369,184.84 TOTAL ANNUAL COST OF OPTION 2 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM =0 =0.5 =1 $ 858,783.67 $ 949,123.92 $ 1,019,790.02 $ 1,063,918.19 OPTION 2: Build a National Distribution Center (NDC) and close 5 regional DCs. 1892.1 690,616.50 | V $ 1,300,000.00 $ 250,000.00 $ 1,050,000.00 Products handled at NDC/day. Products handled at NDC/year. Annual savings $ 205,134.53 USD in best-case scenario. $ 114,794.27 USD in middle-case scenario. $ 44,128.17 USD in worst-case scenario. Time to recover investment. 5.118592234 Years in best-case scenario. 9.14679808 Years in middle-case scenario. 23.79432481 Years in worst-case scenario. worst-case scenario: =1

Cost of NDC construction Money recovered from DCs. Initial investment required

best-case scenario: =0

middle-case scenario: =0.5

handled per year.

DC 4 11.81 3.48 6.16 6.76 1.94 3.76

DC 5 3.36 4.49 7.49 3.56 2.54 3.98

High DC 1 DC 2 DC 3 DC 4 DC 5 Medium DC 1 DC 2 DC 3 DC 4 DC 5 Low DC 1 DC 2 DC 3 DC 4 DC 5

DC 1

DC 2 DC 3 DC 4 DC 5 45.2304 36.7148 24.2904 31.3402 34.0848 22.5504 29.0952 18.3048 23.6174 15.6252

DC 1

DC 2 DC 3 DC 4 DC 5 19.592 20.1924 21.3616 11.2496 39.618 41.912 22.072 43.1964 22.7484 24.0656

S. D. =1 20.77264 20.33807 10.59924

DC 1

at NDC for possible values.

DC 2 DC 3 DC 4 DC 5 2.8116 4.7322 7.4448 7.8804 3.3938 5.3392 5.6516 8.9864 9.5122 14.9648

Periodic review policy = OUL Transport $/u Current NDC Plant to DC TL 0.09 0.05 DC to cust. LTL 0.1 0.24 L+R 11 R=T 6 L 5 days ----> 4 1

z=

Holding $/(u*day) 1.6448536 CSL

0.15 (transit or storage) 95%

TC =

(Holding cost of inventory in storage)+(Holding cost of inventory in t (Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#day Avg Inv = Q/2 + SS Q = *R in OUL

Total units transported in a year =

High = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 150.6489 291.0757 431.5025

i ^2 i ^2 150.6489 150.6489 150.6489

+ (ij*i*j) + ij*(i*j) 0 140.4268 280.8536

if i j if i j

Medium = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 147.6289 280.6329 413.6369

i ^2 + (ij*i*j) i ^2 + ij*(i*j) 147.6289 0 147.6289 133.004 147.6289 266.008

if i j if i j

Low = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = i ^2 + (ij*i*j) ^2 = i ^2 + ij*(i*j) 41.6269 41.6269 0 76.9854 41.6269 35.3585 112.3439 41.6269 70.717

if i j if i j

days in production days in transit (transit or storage)

in storage)+(Holding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer) al units transported in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365) Total units transported in a year = (lot size)*(# of orders in a year) = Q*(365/R)

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

on cost from DC to customer)

ALKO case study OPTION 3: Use current distribution system for High products and build NDC for Middle and Low products.

100 Products Part 1 Part 3 Part 7 10 High 20 Medium 70 Low

Daily Demand for 1 product DC 1 DC 2 Mean 35.48 S. D. 6.98 Mean 2.48 S. D. 3.16 Mean 0.48 S. D. 1.98

DC 3 22.61 6.48 4.15 6.2 0.73 1.42 17.66 5.26 6.15 6.39 0.8 2.39

NDC Aggregation 100 Products 10 High 20 Medium 70 Low

Daily Demand for 1 product S. D. =0 S. D. =0.5 Mean 90.92 12.27391136 17.06094077 26.43 12.15026337 16.75210136 6.49 6.451891196 8.774132436

ANNUAL COST (Inventory + distribution) of option 3 with with H products at 5 DCs and M/L products at NDC for possible values. High $ 341,885.80 =0 =0.5 =1 Medium $ 244,296.79 $ 271,786.43 $ 293,207.62 Low $ 282,473.41 $ 331,026.07 $ 369,184.84 TOTAL ANNUAL COST OF OPTION 3 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM =0 =0.5 =1 $ 868,656.00 $ 944,698.30 $ 1,004,278.26 $ 1,063,918.19 OPTION 3: Handle High products at regional DCs and build NDC for Middle and Low products. 982.9 358,758.50 | V 800,000.00 800,000.00 Products handled at NDC/day. Products handled at NDC/year. Annual savings $ 195,262.20 USD in best-case scenario. $ 119,219.89 USD in middle-case scenario. $ 59,639.93 USD in worst-case scenario. Time to recover investment. 4.097055194 Years in best-case scenario. 6.710289682 Years in middle-case scenario. 13.41383215 Years in worst-case scenario. worst-case scenario: =1

$ $ $

Cost of NDC construction Money recovered from DCs. Initial investment required

best-case scenario: =0

middle-case scenario: =0.5

handled per year.

DC 4 11.81 3.48 6.16 6.76 1.94 3.76

DC 5 3.36 4.49 7.49 3.56 2.54 3.98

High DC 1 DC 2 DC 3 DC 4 DC 5 Medium DC 1 DC 2 DC 3 DC 4 DC 5 Low DC 1 DC 2 DC 3 DC 4 DC 5

DC 1

DC 2 DC 3 DC 4 DC 5 45.2304 36.7148 24.2904 31.3402 34.0848 22.5504 29.0952 18.3048 23.6174 15.6252

DC 1

DC 2 DC 3 DC 4 DC 5 19.592 20.1924 21.3616 11.2496 39.618 41.912 22.072 43.1964 22.7484 24.0656

S. D. =1 20.77264 20.33807 10.59924

DC 1

/L products at NDC for possible values.

DC 2 DC 3 DC 4 DC 5 2.8116 4.7322 7.4448 7.8804 3.3938 5.3392 5.6516 8.9864 9.5122 14.9648

Periodic review policy = OUL Transport $/u Current NDC Plant to DC TL 0.09 0.05 DC to cust. LTL 0.1 0.24 L+R 11 R=T 6 L 5 days ----> 4 1

z=

Holding $/(u*day) 1.6448536 CSL

0.15 (transit or storage) 95%

TC =

(Holding cost of inventory in storage)+(Holding cost of inventory in t (Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#day Avg Inv = Q/2 + SS Q = *R in OUL

Total units transported in a year =

High = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 150.6489 291.0757 431.5025

i ^2 i ^2 150.6489 150.6489 150.6489

+ (ij*i*j) + ij*(i*j) 0 140.4268 280.8536

if i j if i j

Medium = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 147.6289 280.6329 413.6369

i ^2 + (ij*i*j) i ^2 + ij*(i*j) 147.6289 0 147.6289 133.004 147.6289 266.008

if i j if i j

Low = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = i ^2 + (ij*i*j) ^2 = i ^2 + ij*(i*j) 41.6269 41.6269 0 76.9854 41.6269 35.3585 112.3439 41.6269 70.717

if i j if i j

days in production days in transit (transit or storage)

in storage)+(Holding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer) al units transported in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365) Total units transported in a year = (lot size)*(# of orders in a year) = Q*(365/R)

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

on cost from DC to customer)

ALKO case study OPTION 4: Use current distribution system for High and Middle products and build NDC for Low products.

100 Products Part 1 Part 3 Part 7 10 High 20 Medium 70 Low

Daily Demand for 1 product DC 1 DC 2 Mean 35.48 S. D. 6.98 Mean 2.48 S. D. 3.16 Mean 0.48 S. D. 1.98

DC 3 22.61 6.48 4.15 6.2 0.73 1.42 17.66 5.26 6.15 6.39 0.8 2.39

NDC Aggregation 100 Products 10 High 20 Medium 70 Low

Daily Demand for 1 product S. D. =0 S. D. =0.5 Mean 90.92 12.27391136 17.06094077 26.43 12.15026337 16.75210136 6.49 6.451891196 8.774132436

ANNUAL COST (Inventory + distribution) of option 4 with H/M products at 5 DCs and L products at NDC for possible values. High $ 341,885.80 Medium $ 308,154.13 =0 =0.5 =1 Low $ 282,473.41 $ 331,026.07 $ 369,184.84 TOTAL ANNUAL COST OF OPTION 4 for possible values. TOTAL ANNUAL COST OF CURRENT SYSTEM =0 =0.5 =1 $ 932,513.34 $ 981,066.00 $ 1,019,224.77 $ 1,063,918.19 OPTION 4: Handle High and Middle products at regional DCs and build NDC for Low products. 454.3 165,819.50 | V 400,000.00 400,000.00 Products handled at NDC/day. Products handled at NDC/year. Annual savings $ 131,404.86 USD in best-case scenario. $ 82,852.19 USD in middle-case scenario. $ 44,693.42 USD in worst-case scenario. Time to recover investment. 3.044027533 Years in best-case scenario. 4.827874885 Years in middle-case scenario. 8.94986342 Years in worst-case scenario. worst-case scenario: =1

$ $ $

Cost of NDC construction Money recovered from DCs. Initial investment required

best-case scenario: =0

middle-case scenario: =0.5

handled per year.

DC 4 11.81 3.48 6.16 6.76 1.94 3.76

DC 5 3.36 4.49 7.49 3.56 2.54 3.98

High DC 1 DC 2 DC 3 DC 4 DC 5 Medium DC 1 DC 2 DC 3 DC 4 DC 5 Low DC 1 DC 2 DC 3 DC 4 DC 5

DC 1

DC 2 DC 3 DC 4 DC 5 45.2304 36.7148 24.2904 31.3402 34.0848 22.5504 29.0952 18.3048 23.6174 15.6252

DC 1

DC 2 DC 3 DC 4 DC 5 19.592 20.1924 21.3616 11.2496 39.618 41.912 22.072 43.1964 22.7484 24.0656

S. D. =1 20.77264 20.33807 10.59924

DC 1

oducts at NDC for possible values.

DC 2 DC 3 DC 4 DC 5 2.8116 4.7322 7.4448 7.8804 3.3938 5.3392 5.6516 8.9864 9.5122 14.9648

Periodic review policy = OUL Transport $/u Current NDC Plant to DC TL 0.09 0.05 DC to cust. LTL 0.1 0.24 L+R 11 R=T 6 L 5 days ----> 4 1

z=

Holding $/(u*day) 1.6448536 CSL

0.15 (transit or storage) 95%

TC =

(Holding cost of inventory in storage)+(Holding cost of inventory in t (Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#day Avg Inv = Q/2 + SS Q = *R in OUL

Total units transported in a year =

High = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 150.6489 291.0757 431.5025

i ^2 i ^2 150.6489 150.6489 150.6489

+ (ij*i*j) + ij*(i*j) 0 140.4268 280.8536

if i j if i j

Medium = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = ^2 = 147.6289 280.6329 413.6369

i ^2 + (ij*i*j) i ^2 + ij*(i*j) 147.6289 0 147.6289 133.004 147.6289 266.008

if i j if i j

Low = = = 0 ^2 = 0.5 ^2 = 1 ^2 =

^2 = i ^2 + (ij*i*j) ^2 = i ^2 + ij*(i*j) 41.6269 41.6269 0 76.9854 41.6269 35.3585 112.3439 41.6269 70.717

if i j if i j

days in production days in transit (transit or storage)

in storage)+(Holding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer) al units transported in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365) Total units transported in a year = (lot size)*(# of orders in a year) = Q*(365/R)

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

because is the same for all combinations of regions in this case.

on cost from DC to customer)