Inventory Management and Risk Pooling

Question 17: Chapter 2 Inventory Management and Risk Pooling

KLF Electronics is an American manufacturer of electronic equipment. The company has a single manufacturing facility in San Jose, California. KLF Electronics distributes its products through five regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles. In the current distribution system, the United States is partitioned into five major markets, each of which is served by a single regional warehouse. Customers, typically retail outlets, receive items directly from the regional warehouse in their market. That is, in the current distribution system, each customer is assigned to a single market and receives deliveries from one regional warehouse.

The warehouses receive items from the manufacturing facility. Typically, it takes about two weeks to satisfy an order placed by any of the regional warehouses. Currently, KLF provides their customers with a service level of about 90 percent. In recent years, KLF has seen a significant increase in competition and huge pressure from their customers to improve the service level and reduce costs. To improve the service level and reduce costs, KLF would like to consider an alternative distribution strategy in which the five regional warehouses are replaced with a single, central warehouse that will be in charge of all customer orders. This warehouse should be one of the existing warehouses. The company CEO insists that whatever distribution strategy is used, KLF will design the strategy so that service level is increased to about 97 percent.

Answer the following three questions: Issue 1: a. A detailed analysis of customer demand in the five market areas reveals that the demand in the five regions is very similar; that is, it is common that if weekly demand in one region is above average, so is the weekly demand in the other regions. How does this observation affect the attractiveness of the new system?

Issue 2: b. To perform a rigorous...