VINOD GUPTA SCHOOL OF MANAGEMENT,IIT KHARAGPUR

TEAM: KRUSHERS

Name : Ratan Ranjan eMail: ratan280@gmail.com Phone: 07797257044

Name: Sachin Choudhary eMail: Sachin.choudhary21vgsom@gmail.com Phone: 09635152521

Option 1: Implementing the following policy changes:1. Greater enforcement by the warehouse managers of maintaining only sufficient inventories in the warehouses to meet the companys target service level of 99% Impact: Current inventory level at end of 2009 = $ 4.44 million (Since the whole case involves inventory in North American warehouses and in transit); From Table 6 in case. Projected inventory level at end of 2010 is given in Appendix 2 (Assumption 1). North American warehouses and in transit at end of 2010 = $ 5.33 million. All values are projected demand for year 2010
No. of W/H Demand Standard Deviation Target Fill (service level) Optimal Stock Optimal Stock in all W/H Cost of optimal inventory Weightage Total cost of optimal inventory for 100% units Total cost of optimal inventory for 100% units with weightage Griffin 500ml Beaker 8 65.04 25.68 0.99 124.78 998.24 $3,953.05 68% $3,953,049.83 $2,705,139.38 Erlenmeyer 500 ml flask 8 19.56 13.08 0.99 49.99 399.91 $1,823.59 32% $6,078,617.43 $1,918,915.92 Row total

$5,776.64 $10,031,667.26 $4,624,055.29

Optimal stock = NORMINV (service level, Average bi weekly demand, SD of Average bi weekly demand) Because Q* = F-1 (Cu / (Cu + Co) as given in case. Cost of optimal inventory = Optimal Stock * cost price. Weightage = Cost of optimal inventory of one product / (Cost of optimal inventory for both products) Ex. Weightage (Griffin 500ml Beaker) = $3,953.05 / $5,776.64 Total cost of optimal inventory for 100% units with weight age = Ex. Total cost of optimal inventory for 100% units with weight age (Griffin 500ml Beaker)= 68% * $3,953,049.83 Therefore total cost of inventory with 99% service level = $4,624,055.29 2. Discontinuation of the practice of allowing salespeople to maintain trunk stock Impact:Removing trunk cost kept with sales people will not increase the service level because the trunk stock is already considered for calculating service level. However as correctly pointed out, this will reduce the responsiveness of sales people and they will lose the hard earned customers. We can easily reduce the service level further because industry standard is well below 99% at 93% thus ensuring efficiency and responsiveness. 3. Creation of daily reports and weekly summaries on inventory movements for every warehouse. Impact:-

For better management of inventory it is necessary that reports and weekly summaries are prepared for every warehouse. However daily report will increase the workload and make report generation redundant. Reports every 3 days will serve the purpose and any skewed data can then be studied once in a while. 4. Periodic physical audits and control procedures for all warehouse stocks. Impact:Periodic physical audits of stocks are very necessary for checking the veracity of period and weekly inventory movement report generated by warehouse. This is necessary for maintaining service level and checking if sales manager are maintaining more than required trunk costs.

Option 2: Consolidating warehouse In the current setup of eight warehouses, product is transferred to the customer in two stages. First products get transported to seven warehouses from Waltham. In second stage these products get transferred to the customer from all the eight warehouses. Consolidating warehouse will have one central warehouse at Waltham.
Produ ct Catego Containers ry (bottles/flasks) Units sold (000s) 2321 Expect ed units sale in 2010 (000s) 2785.2 Weigh t pound / unit 0.25 Measuring devices( beakers,pipettes, cylinders)

Fittings (stoppers, adapters)

Funnels

Handlers (forceps, stirrers, trays)

Tubes

Other

1283

442

185

1732

4420

18

1539.6

530.4

222

2078.4

5304

21.6

0.13

0.09

0.16

0.05

0.06

0.13

Cost calculation of transportation for the current setup is given in table below.

Table 3: Cost of transportation with consolidating warehouses in waltham with winged fleet (option 2) Across 1 region fee ($ per order) Across 2 region fee ($ per order) Within region fee ($ per order) Weight Fee ($ per pound) Weight (pound / unit) Avg customer order weight (pound) Total Demand ('000) Demand for one territory ('000) Demand for Central Region (3 warehouse)('000) Demand for West Region (2 warehouse) ('000) Demand for East Region (3 warehouse) ('000) Total Fixed Costs across 1 Region (central)(in $ '000) Total weight fee across 1 Region (central) (in $ '000)

Measuring Container devices( s beakers,pip (bottles/f ettes,cylind lasks) er) 12.00 16.00 5.00 1.16 0.25 9.80 2785.20 348.15 5.00 12.00 16.00 1.16 0.13 9.80 1539.60 192.45

Fittings (stoppers, adapters)

Funnels

Handlers (forceps, stirrers, trays)

Tubes

Oth er

Remarks

5.00 12.00 16.00 1.16 0.09 9.80 530.40 66.30

5.00 12.00 16.00 1.16 0.16 9.80 222.00 27.75

5.00 12.00 16.00 1.16 0.05 9.80 2078.40 259.80

5.00 12.00 16.00 1.16 0.06 9.80 5304.00 663.00

5.00 12.0 0 16.0 0 1.16 0.13 9.80 21.6 0 2.70

1044.45 696.30 1044.45

577.35 384.90 577.35

198.90 132.60 198.90

83.25 55.50 83.25

779.40 519.60 779.40

1989.00 1326.00 1989.00

8.10 5.40 8.10 Demand*(pound/unit)* (cost per order)/(Avg. customer order) Demand*(pound/unit)* (weight fee)

319.73

36.82

9.54

6.65

18.69

63.42

0.54

302.89

83.72

21.69

15.13

42.49

144.20

1.22

Total Fixed Costs across 2 Region (west)(in $ '000) Total weight fee across 2 Region (west) (in $ '000) Total Fixed Costs Within Region (east)(in $ '000) Total weight fee Within Region (east) (in $ '000) Total Cost (in $ '000) Total Cost for all products (in $ '000)

284.20 201.93 133.22 302.89 1544.86 3154.26

58.91 55.81 117.83 83.72 436.80

15.26 14.46 30.53 21.69 113.16

10.65 10.09 21.29 15.13 78.94

29.90 28.33 59.81 42.49 221.71

101.48 96.14 202.96 144.20 752.40

0.86 0.81 1.72 1.22 6.37

When product transported and distributed from a consolidate central warehouse, for transportation purpose the network gets divided up in three region central, East and West warehouses based on geographical location. Freight of different region will be as per the annexure given in the case. Cost calculation of transportation for the centralised warehouse setup is given in table below. Eastern region (3 warehouses) central region (3 warehouses) western region (2 warehouses)

Total Transportation Cost = $ 3,154,257.78

Option 3: Outsourcing Warehousing to Global Logistics In case of outsourcing warehouse function to M/S Global, all goods would have to first be shipped from Waltham to Atlanta using standard bulk shipment option. After this all order-fulfilment and inventory-control functions would be administered by Global Logistics. Cost calculation of transportation in case of outsourcing of warehouse function to Global Logistics is given in table below.
Table 3: Cost of transportation with Outsourcing Warehousing to Global Logistics (option 3) Cost of delivery fromAtlanta to: (per 10 pound) Southeast ($) Northeast ($) Central ($) Southwest ($) Northwest ($) Weight / unit (pounds) Avg customer order weight (pounds) Measuring devices( beakers,pip ettes,cylind er)

Container s (bottles/fl asks)

Fittings (stoppers, adapters)

Funnels

Handlers (forceps, stirrers, trays)

Tubes

Oth er

Remarks

16.69 18.91 22.25 24.48 25.59 0.25 9.80

16.69 18.91 22.25 24.48 25.59 0.13 9.80

16.69 18.91 22.25 24.48 25.59 0.09 9.80

16.69 18.91 22.25 24.48 25.59 0.16 9.80

16.69 18.91 22.25 24.48 25.59 0.05 9.80

16.69 18.91 22.25 24.48 25.59 0.06 9.80

16.6 9 18.9 1 22.2 5 24.4 8 25.5 9 0.13 9.80

Total Demand ('000) Demand / sales territory ('000) (total 8 territory ) Cost for bulk shipments / pound ($) Total Shipment cost to Atlanta Total Demand in following regions ('000) Southeast (1 sales territory) Northeast (3 sales territory) Central (2 sales territory) Southwest (1 sales territory) Northwest (1 sales territory) Total shipment cost ($ 000) depending on regional demand Southeast (1 sales territory) Northeast (3 sales territory) Central (2 sales territory) Southwest (1 sales territory) Northwest (1 sales

2785.2

1539.6

530.4

222

2078.4

5304

21.6

348.15 192.45 $ $ $ 0.40 0.40 0.40 $ $ $ 278.52 76.98 19.94

66.3 $ 0.40 $ 13.91

27.75 $ 0.40 $ 39.07

259.8 $ 0.40 $ 132.60

663

2.7 $ 0.40 $ 1.12

348.15 1044.45 696.3 348.15 348.15

192.45 577.35 384.9 192.45 192.45

66.3 198.9 132.6 66.3 66.3

27.75 83.25 55.5 27.75 27.75

259.8 779.4 519.6 259.8 259.8

663 1989 1326 663 663

2.7 8.1 5.4 2.7 2.7

$ 148.23 $ 503.84 $ 395.22 $ 217.42 $

$ 40.97 $ 139.26 $ 109.24 $ 60.09 $

$ 10.61 $ 36.08 $ 28.30 $ 15.57 $

$ 7.40 $ 25.17 $ 19.74 $ 10.86 $

$ 20.80 $ 70.68 $ 55.45 $ 30.50 $

$ 70.57 $ 239.87 $ 188.16 $ 103.51 $

$ 0.60 $ 2.03 $ 1.59 $ 0.88 $

Average weight of customer demand is 9.8 pounds which is almost equal to 10 pounds for which the costs are given. Hence number of orders calculated using 9.8 pounds and cost assigned of 10 pounds.

territory) 227.27 Total Cost, product $ wise ($ 000) 1,770.50 $ Total Cost ($ 000) 3,573.50

62.82 $ 489.35

16.27 $ 126.77

11.35 $ 88.44

31.88 $ 248.39

108.20 $ 842.91

0.92 $ 7.14

Total cost of transportation in case ALEL outsource warehouse function to Global Logistics will be $ 3,573,502.33

Option 4: Reducing the target service level Impact: The best bet of reducing the target service level will be reducing it to the optimal service level for the two representative products as mentioned in the case (from Appendix 1). The calculations involved in this section are the same as those in part 1 of option 1. Griffin 500ml Beaker No. of W/H Demand Standard Deviation Target Fill (service level) Optimal Stock Optimal Stock in all W/H Cost of optimal inventory Weightage Total cost of optimal inventory for 100% units Total cost of optimal inventory for 100% units with weightage Total cost of maintaining inventory = $3,944,985.93 $2,413,139.69 $1,531,846.24 $3,944,985.93 8 65.04 25.68 0.958 109.41 875.31 $3,466.22 70% $3,466,215.04 Erlenmeyer 500 ml flask 8 19.56 13.08 0.953 41.46 331.72 $1,512.63 30% $5,042,097.40 $8,508,312.43 $4,978.84

Option 5: Combining options 3 and 4 As mentioned in case outsourcing warehousing to global logistics will enable ALEL get rid of inventory write-offs ie. Insurance (1%) and warehouse operation cost (15%). Both these expenses will be eliminated resulting in decrease of cost for both the represented products. There will be new underage cost (10 % of cost) and overage cost (0.54% of cost). The new fill rate is calculated in the below table.
Present details Griffin 500ml Erlenmeyer 500 ml Beaker flask 3.96 4.56 8.8 9.5 0.0396 0.0456 0.5544 0.6384 0.594 4.84 0.48 0.02 95.81% 0.684 4.94 0.49 0.03 95.15% Outsourcing to global logistics Griffin 500ml Erlenmeyer 500 ml Beaker flask 3.3264 3.8304 8.8 9.5 0.465696 0.536256

Unit cost Unit price Insurance cost Cost of capital Warehouse operation Gross margin Underage cost Overage cost Fill rate

5.4736 0.54736 0.01796256 96.82%

5.6696 0.56696 0.02068416 96.48%

Note: When transportation is given to Global logistics only one (1) central warehouse will be required. Table below gives the optimal level of inventory required for above calculated fill rate.

No. of W/H Average bi weekly demand Standard deviation of Average bi weekly demand Target Fill (service level) Optimal Stock Optimal Stock in all W/H Cost of optimal inventory Weightage Total cost of optimal inventory for 100% units Total cost of optimal inventory for 100% units with weightage

Griffin 500ml Beaker 1 520.08 61.2 96.82% 633.63 633.63 $2,107.70 72% $2,107,695.77 $1,519,880.28

Erlenmeyer 500 ml flask 1 156.36 31.2 96.48% 212.81 212.81 $815.15 28% $2,717,179.42 $757,794.45

$2,922.85

$4,824,875.19 $2,277,674.73

Comparison of all the options mentioned in the question

Option 1 Option 2 Option 3 Option 4 Option 5 Implementing the Proposed policy Changes + All 8 warehouses and winged fleet Consolidating Warehouses + Expected inventory with 1 warehouse Outsourcing Warehousing to Global Logistics + Inventory with 1 warehouse Reduced service level (optimal) + All 8 warehouses and winged fleet Outsourcing Warehousing to Global Logistics + Reduced service level (New optimal)

Inventory Level Transportation Cost Total Cost

Option 1 $ 4,624,055.29 $ 2,844,776.74 $ 7,468,832.04

Option 2 $ 2,867,164.38 $ 3,154,257.78 $ 6,021,422.16

Option 3 $ 2,867,164.38 $ 3,573,502.33 $ 6,440,666.71

Option 4 $ 3,944,985.93 $ 2,844,776.74 $ 6,789,762.67

Option 5 $ 2,277,674.73 $ 3,573,502.33 $ 5,851,177.06

Hence, we can see by comparison that OPTION 5 is the best alternative.

Appendix 1 2010 Griffin 500ml Beaker Erlenmeyer 500 ml flask Comments 20% increase from 2009

Units sold Percent of all units sold Annual carrying costs (%) Unit price Unit cost Cost of underage Cost of overage Optimal service level Average bi-weekly demand (8 warehouses) Standard deviation of bi-weekly demand (8 warehouses) Average bi-weekly demand (2 warehouses) Standard deviation of bi-weekly demand (2 warehouses) Average bi-weekly demand ( 1 warehouse) Standard deviation of bi-weekly demand (1 warehouse)

13521.6 0.10% 14% $8.80 $3.96 $0.48 $0.02 95.80% 65.04 25.68 260.04 45.96 520.08 61.2

4066.8 0.03% 14% $9.50 $4.56 $0.49 $0.03 95.30% 19.56 13.08 78.24 23.4 156.36 31.2

20% increase from 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009

Appendix 2: Dec-09 Raw materials/WIP inventory Finished goods inventory Manufacturing site North American warehouses and in transit Overseas warehouses and in transit Total finished goods Total inventory 1.90 6.54 8.72 2.28 7.85 10.46 2.18 Dec-10 Comments 20% increase from 2.616 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009 20% increase from 2009

0.20 4.44

0.24 5.33

Assumptions: 1) Inventory also increases by 20% in the next year corresponding to increase in sales. 2) Mapping of region and warehouses depending on the location given in the map earlier in the document.

Eastern Region Central Region Western Region

Winged fleet Waltham + Toronto + Chicago Denver + Dallas + Atlanta Phoenix + Seattle Global Logistics Atlanta Chicago, Toronto, Waltham Dallas + Denver Phoenix Seattle

Southeast Northeast Central Southwest Northwest

Costs for the different regions were also considered for taking decisions.

3) For calculating transportation cost for GLOBAL Logistics average weight of customer demand is 9.8 pounds which is almost equal to 10 pounds for which the costs are given. Hence number of orders calculated using 9.8 pounds and cost assigned of 10 pounds.