alko
To survive in the fierce competition of the industry, ALKO must have an efficient and cost-saving inventory system. The purpose of this report is to analyze the distribution network of ALKO INC in order to minimize its total annual cost that subject to a customer service level of 95%.
Current System
First of all, let’s look at the situations of current ALKO’s distribution system. Take annual cost of 1 high product at DC1 under current system as example:Averageinventory=Q/2+SS=T*D/2+Z*σD*√T+L=6*35.48/2+1.645(CSL=95%)*6.98*√6+5=212.88/2+38.08=144.52units, Order up to level=DT+L+SS= (6+5)*35.48+38.08=390.28+38.08=428.4units,Total units transported annually=Q*(365/6)=212.88*(365/6)=212.88units/order*60.83orders=12950.2units. And we got the: Holding cost of inventory in storage= $0.15/unit/day*144.52units*365days=$7,912.5, Holding cost of inventory in transit=$0.15/unit*12950.2units=$1,942.5,Transportation cost from plant to DC1=$0.09/unit/day*35.48units*365days=$1,165.5, Transportation cost from DC to customer=$0.1/unit/day*35.48units*365days=$1,295. Therefore, in current system: Annual Cost of 1 high product at Distribution Centre1 =7912.5+1942.5+$1165.5+$1295=$12,315.5. Then 10 high products of DC1 will be $123,155. After calculating all the other costs in this method, the total annual cost of inventory and distribution in current system is $1,063,918.
Setting up NDC instead of 5 DCs
What will be the situation if we close 5 regional DCs and build a national distribution center outside Chicago instead? Will this change reduce ALKO’s annual cost of inventory and distribution? After aggregation, average daily demand of high, medium and low products of National Distribution Centre will be 90.92, 26.43 and 6.49 units separately. Take annual cost of 1 high product in NDC when correlation coefficientρ is 0 as example: Average inventory=Q/2+SS=T*D/2+Z*σD*√T+L=6*90.92/2+1.645(when CSL=95%: Z*=1.645)*12.27(when
Current System
First of all, let’s look at the situations of current ALKO’s distribution system. Take annual cost of 1 high product at DC1 under current system as example:Averageinventory=Q/2+SS=T*D/2+Z*σD*√T+L=6*35.48/2+1.645(CSL=95%)*6.98*√6+5=212.88/2+38.08=144.52units, Order up to level=DT+L+SS= (6+5)*35.48+38.08=390.28+38.08=428.4units,Total units transported annually=Q*(365/6)=212.88*(365/6)=212.88units/order*60.83orders=12950.2units. And we got the: Holding cost of inventory in storage= $0.15/unit/day*144.52units*365days=$7,912.5, Holding cost of inventory in transit=$0.15/unit*12950.2units=$1,942.5,Transportation cost from plant to DC1=$0.09/unit/day*35.48units*365days=$1,165.5, Transportation cost from DC to customer=$0.1/unit/day*35.48units*365days=$1,295. Therefore, in current system: Annual Cost of 1 high product at Distribution Centre1 =7912.5+1942.5+$1165.5+$1295=$12,315.5. Then 10 high products of DC1 will be $123,155. After calculating all the other costs in this method, the total annual cost of inventory and distribution in current system is $1,063,918.
Setting up NDC instead of 5 DCs
What will be the situation if we close 5 regional DCs and build a national distribution center outside Chicago instead? Will this change reduce ALKO’s annual cost of inventory and distribution? After aggregation, average daily demand of high, medium and low products of National Distribution Centre will be 90.92, 26.43 and 6.49 units separately. Take annual cost of 1 high product in NDC when correlation coefficientρ is 0 as example: Average inventory=Q/2+SS=T*D/2+Z*σD*√T+L=6*90.92/2+1.645(when CSL=95%: Z*=1.645)*12.27(when