Student Name: Trần Minh Hoàng

Student ID: IELSIU18042

HOMEWORK – SUPPLY CHAIN DESIGN

Chapter 7: Supply Chain Aggregation

Question 1: (30 points)

Harley purchases components from three suppliers. Components purchased from Supplier A
are priced at $5 each and used at the rate of 20,000 units per month. Components purchased
from Supplier B are priced at $4 each and are used at the rate of 2,500 units per month.
Components purchased from Supplier C are priced at $5 each and used at the rate of 900
units per month. Currently, Harley purchases a separate truckload from each supplier.

As part of its JIT drive, Harley has decided to aggregate purchases from the three suppliers.
The trucking company charges a fixed cost of $400 for the truck with an additional charge of
$100 for each stop.

Thus, currently Harley incurs a fixed order cost of $500 for ordering each component
separately, but Harley wants to place joint orders for the three components (not necessarily
with the same quantity) which would incur a fixed order cost of $700.

Suggest a replenishment strategy for Harley that minimizes annual cost. Assume a holding
cost of 20 percent per year.

Compare the cost of your strategy with Harley’s current strategy of ordering separately from
each supplier?

a. Calculate the total cost for orders placed separately from Supplier A, B, C.

Determining the separate orders from the suppliers and the details related to purchase for
the components for the three suppliers are:
Supplier A:
Annual purchase quantity:
= 20,000 units per month x 12 = 240,000 units
Setup cost (S) = $500
Cost of component = $5
Annual holding cost % (h) = 0.2
Supplier B:
Annual purchase quantity: 
= 2,500 units per month x 12 = 30,000 units
Setup cost (S) = $500
Cost of component = $4
Annual holding cost % (h) = 0.2
Supplier C:
Annual purchase quantity:
= 900 units per month x 12 =10,800 units

1
Student Name: Trần Minh Hoàng
Student ID: IELSIU18042

Setup cost (S) = $500

Cost of component = $5
Annual holding cost % (h) = 0.2
Calculating the economic order quantity (EOQ) for every supplier :
2 DS
Optimal lot size (Q*) = √
hC
Total cost = ( QD ) × S+( Q2 )× h× C
Determining the total cost and the optimal order quantity :

Supplie Holding
Unit Cost Demand Setup cost EOQ Total cost
r cost
A 5 0.2 240,000 500 15491.93 15491.93
B 4 0.2 30,000 500 6123.72 4898.98
C 5 0.2 10,800 500 3286.34 3286.34
Total 23677.25
 The total cost of the ordering separately is $23,677.25

b. Calculate the total cost for orders placed jointly from Supplier A, B, C.

Ordering jointly for all components:

Supplier A:
Annual purchase quantity = 20,000 units per month x 12 = 240,000 units
Setup cost (S) = $500
Cost of component = $5
Annual holding cost % (h) = 0.2
Supplier B:
Annual purchase quantity = 2,500 units per month x 12 = 30,000 units
Setup cost (S) = $500
Cost of component = $4
Annual holding cost % (h) = 0.2
Supplier C:
Annual purchase quantity = 900 units per month x 12 =10,800 units
Setup cost (S) = $500
Cost of component = $5
Annual holding cost % (h) = 0.2
Calculating the number of orders:
2
Student Name: Trần Minh Hoàng
Student ID: IELSIU18042

240000 × 0.2× 5+30000× 0.2 ×4 +10800 ×0.2 ×5

n=
√ 2 ×700
=14.01

Calculating the total cost of ordering aggregate:

Annual inventory cost
240000 × 0.2× 5+30000× 0.2 ×4 +10800 ×0.2 ×5
=
√ 2 ×14.01
+700 ×14.01=19,614.27

 The total cost of ordering aggregately is $19,614

Ordering jointly for selected subset of the components:

Step 1: Identify the most frequently ordered product.

0.2× 5× 240000
n´A =
√
2( 400+100)
0.2× 4 × 30000
= 15.5

n´B=
√
2( 400+100)
= 4.9

0.2 ×5 ×10800
ń c =
√
2(400+ 100)
¿> ńmax =15.5
= 3.3

¿>The most frequently ordered product is∈supplier A

Step 2: For products in supplier B, C: evaluating the ordering frequency
0.2 × 4 ×30000
´´
nB=
√
2× 100
=10.95

0.2× 5× 10800
´´
nC=
√ 2× 100
= 7.35
Step 3: For products in supplier B, C: evaluate the frequency of product B, C
relative to the most frequently ordered B and C
ń
m B = ´ =[ 15.5 ]=2
[ ]
nB
´ 10.95
ń
m c = ´ =[ 15.5 ]=¿3
nC
´ [ ]
7.35

Step 4: Recalculating the ordering frequency of the most frequently ordered

product A:

n=

√ ∑ hCi × mi × Di
i=1

(
l
2 S+ ∑ si/mi
i=1
)
Step 5: Calculate total annual cost
=16.57

3
Student Name: Trần Minh Hoàng
Student ID: IELSIU18042

n
nA= =16.57 (year)
mA
n
nB= =¿ 8.258 (year)
mB
n
nC= =¿5.523 (year)
mC

l l
Di
TC=nS+ ∑ ¿ × si+ ∑ ¿ ¿19,335.97
i=1 i=1 2∋¿ ×h ×Ci=¿

c. What ordering policy should be applied? How much savings could be earns from the
the recommended policy?

The third policy, which is ordering jointly for selected subset of components, should be
applied

The savings could be earns from that policy is 23,677.25−19,335.97=4341.28

Question 2: (30 points)

An online retailer is debating whether to serve the United States through four regional
distribution centers or one national distribution center. Weekly demand in each region is
normally distributed, with a mean of 1,200 and a standard deviation of 200.
Demand experienced in each region is independent, and supply lead time is 3 weeks. The
online retailer has a holding cost of 25 percent and the cost of each product is $1,200. The
retailer promises its customers next-day delivery. With four regional distribution centers, the
retailer can provide next-day delivery using ground transportation at a cost of $12/unit. With
a single national distribution center, the retailer will have to use a more expensive mode of
transport that will cost $15/unit for next-day service. Building and operating four regional
DCs costs $120,000 per year more than building and operating one national distribution
center.
Assume a desired CSL of 0.95.
a. What is the required safety inventory for the decentralized option of having four
regional distribution centers?
Decentralized option
The required safety inventory in the decentralized option for CSL = 0.90 is
s=k × F S−1 ( CSL ) × √ L× σ D= 4 ×1.644 × √3 ×200=¿2,279.176 units

b. What is the required safety inventory for the centralized option of having only one
national distribution center?

4
Student Name: Trần Minh Hoàng
Student ID: IELSIU18042

For a CSL of 0.90 and  = 0, safety inventory required for the aggregate option is:
ss=F S−1 (CSL ) × √ L× σ DC =F S−1 ( CSL) × √ L × √ k σ D
=1.644 × √3 × √ 4 ×200=1,139.588units

c. What distribution network do you recommend according to safety inventory level and
cost?
Decentralized option for 1 year
Assume that 1 year has 52 weeks
Total annual cost :
=1200×52 × 4 ×12+¿2279.176× 0.25× 1200+¿120000 = 3,798,953 per year (1)
Aggregate option
Total annual cost= Transportation cost+ Holding cost of safety stock
=1200×52 × 4 ×15+1139.588 × 0.25 ×1200=¿4,085,876 per year (2)
(1)&(2) => We should choose decentralized option