Business Situation:

 ACME produces and distributes electronic equipment in northeast of US face a distribution problem.
 Current distribution system partitions northeast into two markets
o Each has a single warehouse
 One in Paramus, NJ; one in Newton, MA
o Customers receive items directly from the warehouses
o Each customers is assigned to a single market and receives deliveries from the corresponding warehouses
o Warehouse receive item from manufacturing facility in Chicago
o Was designed over 7 years ago, newly appointed CEO would like to review logistics and distribution system
--> insists same service level 97% be maintained
 Lead time for delivery to each warehouse is about one week
 Consider to replace two warehouses with a single warehouse located between Paramus and Newton that will serve all
customer orders --> centralized distribution system --> allows to achieve same service level with much lower inventory or
a higher service level with the same amount of total inventory
o Aggregate forecast are more accurate
Analysis and Insight:
 Current distribution strategy provides 97% service level and 3% of stockout possibility -unfilled orders are lost to the
competition and cannot satisfy by future deliveries
 1500 different products in Supply Chain and serves 10,000 accounts in Northeast
 Factory costs $60 per order, holding inventory costs $0.27 per unit per week, cost of transporting a product from a
warehouse to the customer $1.05 per product, transportation cost from central warehouse $1.10 per product.
o Assume delivery lead time is not significantly different
Customers walk away to the competitors
Specialty has 130 customer and 120 products - its like 1:1 ratio more like you create specific product for specific customers
Trouble Managing their inventory levels more focus on customer rather than inventory control
Goal is to lower performance
 
Poor performance - 70% of the order scheduled to be shipped from stock within 48 hours, the rest 30% are either cancelled by
the customer at the time or placed in backorder (overall)
Annual sale is 400 M --> losing additional $60 M due to potential sales
Sales drop and expense
Recommendations:
 Facilitate better inventory mgnt - help with demand forecast - be able to manage your safety stock on top of your
demand forecast on any sort of ERP system -
 Balance between customer satisfaction and inventory control
o Look product offerings - consider to drop low profit margin products - letting their key customers know
that they are no longer carrying as looking at the ratio is 120 products to 130 customers which does not making
sense
 FIFO for inventory mgmt - whether comes in the first should be the first out of the warehouse - we can greatly avoid
products that are expire or obsolete as well as the inventory holding costs