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Case Study Project #2 Alina Logounova Nany Karlina DS 855 Professor Bollapragada San Francisco State University Fall, 2010

Overview 1. Chapter 10 Case Study: Delivery Strategy at MoonChem a. Annual cost of existing strategy b. Considering different delivery options c. Impact of the proposed recommendation on consignment inventory

2. Chapter 11 Case Study: Managing Inventories at Alko Inc. a. Annual costs b. Savings associated with NDC and recommendations c. Recommendation and evaluation of other distribution systems

1. Chapter 10 Case Study: Delivery Strategy at MoonChem MoonChem is a manufacturer of specialty chemicals that decides to examine its delivery options to its customers. The necessary arose from concerns of inventory turnover being very low and discrepancies between 20 percent of its customers carrying consignment inventory, but over half of the inventory of MoonChem being in consignment with its customers. MoonChem has eight manufacturing plants, where base chemicals are made, and forty distribution centers, where chemicals are being mixed to produce various products and then are being shipped to its customers. In order to examine current distribution operations, John Kresge, Vice President of Supply Chain, decides to focus on the state of Illinois area with zip code 615, Peoria, which customers, who carry consignment inventory, are supplied from Chicago distribution center. MoonChem s customers data is given in the table 1.a.

Customer category Small Medium Large

Number of customers 12 6 2 Table 1.a

Demand per month/ year 1,000/ 12,000 5,000/ 60,000 12,000/ 144,000

MoonChem ships its products by trucks, which have 40,000 pound capacity. Transportation cost is fixed at $350.00 with additional $50.00 for each drop off. Given that MoonChem ships its products independently to each customer, transportation cost totals to $400.00 per shipment. In addition, MoonChem sends full truckloads to customer with consignment. In addition, each pound of inventory in consignment costs MoonChem $1.00. The company also has a holding cost of 25%.

1.a. Total annual cost of existing strategy Examining current delivering operations, we have to consider that shipments to customers are made independently. Lot sizes and costs for independent ordering: Small 12,000 $400.00 6,197 3,099 775 1.94 775 13.4 1,550 Medium 60,000 $400.00 13,856 6,928 1,732 4.33 1,732 6.0 3,464 Large 144,000 $400.00 21,466 10,733 2,683 6.71 2,683 3.9 5,366

Demand per year Fixed cost/ order Optimal order size Cycle inventory Annual holding cost Order frequency/ year Annual ordering cost Average flow time (weeks) Annual cost

Based on calculations (see Appendix 1), annual cost of MoonChem s current strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory is $10,380.

1.b. Considering different delivery options There are two alternate distribution models that can be evaluated and implemented instead of the current distribution operations, if found more efficient. First, let s consider the model when products are ordered and delivered jointly. Lot sizes and costs for products being ordered and delivered jointly for all three customers: Small 12,000 1,633 817 205 3.5 Medium 60,000 8,163 4,082 1,021 3.5 Large 144,000 19,592 9,796 2,449 3.5

Demand per year Optimal order size Cycle inventory Annual holding cost Average flow time (weeks)

Fixed cost (S) per order is $350.00 plus $50.00 per drop off. Therefore, total fixed cost per order is $500.00. Ordering frequency (n) is 7.35. Annual ordering cost comes up to $3,675.00. Based on calculations (see Appendix 2), annual cost of proposed strategy 1 of sending products jointly to all three customers in the Peoria region to replenish consignment inventory is $7,350.

Second, let s consider the model when products are ordered and delivered jointly for selected customers. Lot sizes and costs for products being ordered and delivered...
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