Answers

1.-

2.-

The annual inventory and distribution cost of the current distribution system (Option 1) i

We would recommend setting up an NDC because doing so can bring significant savings
However, closing all regional DCs and handling all products at an NDC (Option 2) is not t

3.-

If an NDC is built while keeping all regional DCs open, there are 2 more options:

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

In the best-case scenario, annual savings are slightly higher for option 2 than for option
The required initial investment and its recovery time are much higher for option 2 than f

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

so can bring significant savings to the company in the long term.

ts at an NDC (Option 2) is not the best option.

re are 2 more options:

d products at regional DCs and build an NDC for Middle and Low demand products.

overy time is also the lowest. However, in the long term after investment recovery, option 3 implies higher annu
e higher for option 3 than for option 4.

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

n 3 implies higher annual savings.

vings are higher for option 3.

ALKO case study

OPTION 1: Current distribution system (stock each item at every DC).

Part 1

100 Products
10 High

Part 3

20 Medium

Part 7

70 Low

Daily Demand for 1 product

DC 1
Mean
35.48
S. D.
6.98
Mean
2.48
S. D.
3.16
Mean
0.48
S. D.
1.98

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#.

High

DC 1
DC2
DC 3
$ 123,154.52 $ 84,550.47 $ 66,633.24

Medium

33,178.80

$ 60,969.50

$ 73,638.49

Low

51,085.76

$ 44,423.59

$ 66,116.95

TOTAL ANNUAL COST OF CURRENT

TC =

(Holding cost of inventory in storage)+(Holding cost of inventory in tran

(Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in

t every DC).
1 product
DC 2

DC 3
22.61
6.48
4.15
6.2
0.73
1.42

DC 4
17.66
5.26
6.15
6.39
0.8
2.39

DC 5
11.81
3.48
6.16
6.76
1.94
3.76

Total
3.36
4.49
7.49
3.56
2.54
3.98

t every DC).
ll H/M/L products at DC#.
DC 4
DC 5
TOTAL
$ 44,448.24 $ 23,099.34 $ 341,885.80
$

75,906.40

$ 117,770.79

64,460.92 $

308,154.13

$ 134,481.18 $

413,878.26

AL ANNUAL COST OF CURRENT SYSTEM

###

olding cost of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost f

rted in a year)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

Periodic review policy = OUL

Transport
$/u
Current
NDC
Plant to DC TL
0.09
DC to cust. LTL
0.1
L+R

R=T
11

Holding

CSL
z=

0.05
0.24

L
6

$/(u*day)

5 days ---->
0.15 (transit or storage)

95%
1.6448536

(Transportation cost from DC to customer)

ns. Cost)*D*365)

4 days in production
1 days in transit

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)+
(Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in trans
Avg Inv = Q/2 + SS

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

OUL =

428.35843
(l+r) =
23.150041
(l+r) =
390.28
SS =
38.078429
Q = *R
212.88
in OUL
This estimated Q can be used in OUL when its value
TC = (Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Tran
TC =

12315.452
ANNUAL COST (Inventory + distribution) of current system with 1 high prod
* 10 high products = 123154.52
ANNUAL COST (Inventory + distribution) of current s

product at DC1
of inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to c
ar)*Hday*(#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

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

used in OUL when its value is not provided.

inventory in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to Customer)

nt system with 1 high product at DC1

+ distribution) of current system with 10 high products at DC1

ortation cost from DC to customer)

t from DC to Customer)

ALKO case study

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

Part 1
Part 3
Part 7

100 Products Daily Demand for 1 product

DC 1
DC 2
10 High
Mean
35.48
S. D.
6.98
20 Medium Mean
2.48
S. D.
3.16
70 Low
Mean
0.48
S. D.
1.98
NDC Aggregation
100 Products
10 High
20 Medium
70 Low

22.61
6.48
4.15
6.2
0.73
1.42

Daily Demand for 1 product

Mean
S. D. =0
90.92 12.273911357
26.43 12.150263372
6.49 6.4518911956

ANNUAL COST (Inventory + distribution) of aggregated system with all H/M/L products at NDC for p
=0
=0.5
High
$
332,013.47 $ 346,311.42
Medium
$
244,296.79 $ 271,786.43
Low
$
282,473.41 $ 331,026.07
TOTAL ANNUAL COST OF OPTION 2
for possible values.
TOTAL ANNUAL COST OF CURRENT SYSTEM

=0
=0.5
$ 858,783.67 $949,123.92
###

OPTION 2: Build a National Distribution Center (NDC) and close 5 regional DCs.
1892.1 Products handled at NDC/day.
690,616.50 Products handled at NDC/year.
|
V
$ 1,300,000.00 Cost of NDC construction
$
250,000.00 Money recovered from DCs.
$1,050,000.00 Initial investment required

best-case scenario: =0

Annual savings
$
205,134.53 USD in best-case scenario.
$
114,794.27 USD in middle-case scenar
$
44,128.17 USD in worst-case scenario
Time to recover investment.
5.1185922342 Years in best-case scenario
9.1467980798 Years in middle-case scena
23.7943248074 Years in worst-case scenari

middle-case scenario: =0.5

worst-case scenario: =1

handled per year.

onal DCs.

DC 3

DC 4
17.66
5.26
6.15
6.39
0.8
2.39

DC 5
11.81
3.48
6.16
6.76
1.94
3.76

S. D. =0.5
S. D. =1
17.0609407712 20.772638
16.7521013607 20.338065
8.7741324357 10.599241

products at NDC
=1
$
$
$

for possible values.

357,397.56
293,207.62
369,184.84

=1
$ 1,019,790.02

3.36
4.49
7.49
3.56
2.54
3.98

High
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Medium
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Low
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Periodic review policy = OUL

Transport
Plant to DC
DC to cust.
L+R
11

onal DCs.

n best-case scenario.
n middle-case scenario.
n worst-case scenario.

n best-case scenario.
n middle-case scenario.
n worst-case scenario.

case scenario: =1

z=

TC =

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

High

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

Medium

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

Low

odic review policy = OUL

$/u
Current
NDC
TL
0.09
LTL
0.1
R=T

5 days ---->

Holding
$/(u*day)
1.6448536
CSL

0
0.5
1

=
=
=

0
0.5
1

=
=
=

0
0.5
1

0.05
0.24

L
6

=
=
=

4 days in production
1 days in transit

0.15 (transit or storage)

95%

(Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Transport

(Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in transit))+((TL T
Avg Inv = Q/2 + SS
Q = *R
in OUL

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

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
150.6489 150.6489
0
291.0757 150.6489 140.4268
431.5025 150.6489 280.8536

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
147.6289 147.6289
0
280.6329 147.6289
133.004
413.6369 147.6289
266.008

if i j
if i j

because is the same for

^2 =
^2 =
^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

y in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer)

#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

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

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

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

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

t from DC to customer)

ALKO case study

OPTION 3: Use current distribution system for High products and build NDC for Middle a

Part 1
Part 3
Part 7

100 Products Daily Demand for 1 product

DC 1
DC 2
10 High
Mean
35.48
S. D.
6.98
20 Medium Mean
2.48
S. D.
3.16
70 Low
Mean
0.48
S. D.
1.98
NDC Aggregation
100 Products
10 High
20 Medium
70 Low

22.61
6.48
4.15
6.2
0.73
1.42

Daily Demand for 1 product

Mean
S. D. =0
90.92 12.273911357
26.43 12.1502633716
6.49 6.4518911956

ANNUAL COST (Inventory + distribution) of option 3 with with H products at 5 DCs and M/L product
High
$
341,885.80
=0
=0.5
Medium
$
244,296.79 $ 271,786.43
Low
$
282,473.41 $ 331,026.07
TOTAL ANNUAL COST OF OPTION 3
for possible values.
TOTAL ANNUAL COST OF CURRENT SYSTEM

=0
=0.5
$ 868,656.00 $ 944,698.30
###

OPTION 3: Handle High products at regional DCs and build NDC for Middle and Low prod
982.9 Products handled at NDC/day.
358,758.50 Products handled at NDC/year.
|
V
$
800,000.00 Cost of NDC construction
$
- Money recovered from DCs.
$ 800,000.00 Initial investment required

best-case scenario: =0

Annual savings
$
195,262.20 USD in best-case scenario.
$
119,219.89 USD in middle-case scenar
$
59,639.93 USD in worst-case scenario
Time to recover investment.
4.0970551941 Years in best-case scenario
6.7102896823 Years in middle-case scena
13.4138321546 Years in worst-case scenari

middle-case scenario: =0.5

worst-case scenario: =1

handled per year.

NDC for Middle and Low products.

DC 3

DC 4
17.66
5.26
6.15
6.39
0.8
2.39

DC 5
11.81
3.48
6.16
6.76
1.94
3.76

3.36
4.49
7.49
3.56
2.54
3.98

S. D. =0.5
S. D. =1
17.0609407712 20.772638
16.7521013607 20.338065
8.7741324357 10.599241

Cs and M/L products at NDC for possible values.

=1
$
$

293,207.62
369,184.84

=1
$ 1,004,278.26

High
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Medium
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Low
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Periodic review policy = OUL

Transport
Plant to DC
DC to cust.
L+R
11

ddle and Low products.

z=

best-case scenario.
middle-case scenario.
worst-case scenario.
best-case scenario.
middle-case scenario.
worst-case scenario.

ase scenario: =1

TC =

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

High

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

Medium

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

Low

odic review policy = OUL

$/u
Current
NDC
TL
0.09
LTL
0.1
R=T

5 days ---->

Holding
$/(u*day)
1.6448536
CSL

0
0.5
1

=
=
=

0
0.5
1

=
=
=

0
0.5
1

0.05
0.24

L
6

=
=
=

4 days in production
1 days in transit

0.15 (transit or storage)

95%

(Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Transport

(Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in transit))+((TL T
Avg Inv = Q/2 + SS
Q = *R
in OUL

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

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
150.6489 150.6489
0
291.0757 150.6489 140.4268
431.5025 150.6489 280.8536

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
147.6289 147.6289
0
280.6329 147.6289
133.004
413.6369 147.6289
266.008

if i j
if i j

because is the same for

^2 =
^2 =
^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

y in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer)

#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

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

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

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

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

t from DC to customer)

ALKO case study

OPTION 4: Use current distribution system for High and Middle products and build NDC

Part 1
Part 3
Part 7

100 Products Daily Demand for 1 product

DC 1
DC 2
10 High
Mean
35.48
S. D.
6.98
20 Medium Mean
2.48
S. D.
3.16
70 Low
Mean
0.48
S. D.
1.98
NDC Aggregation
100 Products
10 High
20 Medium
70 Low

22.61
6.48
4.15
6.2
0.73
1.42

Daily Demand for 1 product

Mean
S. D. =0
90.92 12.273911357
26.43 12.1502633716
6.49 6.4518911956

ANNUAL COST (Inventory + distribution) of option 4 with H/M products at 5 DCs and L products at N
High
$
341,885.80
Medium
$
308,154.13
=0
=0.5
Low
$
282,473.41 $ 331,026.07
TOTAL ANNUAL COST OF OPTION 4
for possible values.
TOTAL ANNUAL COST OF CURRENT SYSTEM

=0
=0.5
$ 932,513.34 $ 981,066.00
###

OPTION 4: Handle High and Middle products at regional DCs and build NDC for Low prod
454.3 Products handled at NDC/day.
165,819.50 Products handled at NDC/year.
|
V
$
400,000.00 Cost of NDC construction
$
- Money recovered from DCs.
$ 400,000.00 Initial investment required

best-case scenario: =0

Annual savings
$
131,404.86 USD in best-case scenario.
$
82,852.19 USD in middle-case scenar
$
44,693.42 USD in worst-case scenario
Time to recover investment.
3.0440275334 Years in best-case scenario
4.8278748854 Years in middle-case scena
8.9498634199 Years in worst-case scenari

middle-case scenario: =0.5

worst-case scenario: =1

handled per year.

ts and build NDC for Low products.

DC 3

DC 4
17.66
5.26
6.15
6.39
0.8
2.39

DC 5
11.81
3.48
6.16
6.76
1.94
3.76

S. D. =0.5
S. D. =1
17.0609407712 20.772638
16.7521013607 20.338065
8.7741324357 10.599241
and L products at NDC for possible values.

=1
$

369,184.84

=1
$ 1,019,224.77

3.36
4.49
7.49
3.56
2.54
3.98

High
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Medium
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Low
DC 1
DC 2
DC 3
DC 4
DC 5

DC 1

Periodic review policy = OUL

Transport
Plant to DC
DC to cust.
L+R
11

NDC for Low products.

z=

best-case scenario.
middle-case scenario.
worst-case scenario.
best-case scenario.
middle-case scenario.
worst-case scenario.

ase scenario: =1

TC =

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

High

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

Medium

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

Low

odic review policy = OUL

$/u
Current
NDC
TL
0.09
LTL
0.1
R=T

5 days ---->

Holding
$/(u*day)
1.6448536
CSL

0
0.5
1

=
=
=

0
0.5
1

=
=
=

0
0.5
1

0.05
0.24

L
6

=
=
=

4 days in production
1 days in transit

0.15 (transit or storage)

95%

(Holding cost of inventory in storage)+(Holding cost of inventory in transit)+(Transport

(Avg Inv*Hday*365)+((Total units transported in a year)*Hday*(#days in transit))+((TL T
Avg Inv = Q/2 + SS
Q = *R
in OUL

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

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
150.6489 150.6489
0
291.0757 150.6489 140.4268
431.5025 150.6489 280.8536

if i j
if i j

because is the same for

^2 =
^2 =
^2 =

^2 = i ^2
+ (ij*i*j)
^2 = i ^2
+ ij*(i*j)
147.6289 147.6289
0
280.6329 147.6289
133.004
413.6369 147.6289
266.008

if i j
if i j

because is the same for

^2 =
^2 =
^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

y in transit)+(Transportation cost from plant to DC)+(Transportation cost from DC to customer)

#days in transit))+((TL Trans. Cost)*D*365)+((LTL Trans. Cost)*D*365)

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

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

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

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

t from DC to customer)