Instructions for Problem 2-17, Inventory Management and Risk Pooling

Instructions for Problem 2-17, Inventory Management and Risk Pooling

Objective

The objective of this assignment is to apply techniques in inventory management (continuous review policy) and risk pooling for evaluation of centralized vs. decentralized distribution system.

Assumptions

One manufacturing plant located in San Jose, California.

Five regional warehouses located in Los Angeles, Dallas, Chicago, Atlanta, and Boston. Historical demand data (12 weeks) is provided in Table 2 – 11.

Current system: Electronic equipment manufactured in San Jose is sent to five regional warehouses separately, where they are distributed to their respective markets. Inbound (from San Jose to regional warehouses) and outbound (from regional warehouses to their respective final customers) costs are provided in Table 2 – 12.

New Initiative: Rather than having five regional warehouses, the new initiative aims to consolidate the five regional warehouses into a single centralized warehouse. This means goods from San Jose will be sent to this central warehouse and from there goods will be distributed to customers directly without going through the regional warehouses. In this new initiative, UPS will be used. However, the inbound costs are 50% higher than the current ones in Table 2 – 12. However, the outbound costs from the centralized warehouse to each market are listed in Table 2 – 13. The centralized warehouse will be in one of the current five regional warehouses.

Requirements

1. Evaluate current system performance (at service level of 90% and lead time of two weeks) in terms of the following for each individual regional warehouse and the entire system:

a. Total demand

b. Average weekly demand

c. Standard deviation

d. Safety stocks

e. Re-order point

f. Order quantity

g. Average inventory

h. Total cost (inventory holding cost + setup cost + transportation cost)

Transportation cost = order quantity x transportation cost per unit (inbound + outbound)

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